Investment Property Calculator

How do I know if this is a good property?

investment property calculatorGood question! The answer is “Crunch the numbers first!”

Use an investment property calculator.

I hope you’re not basing your opinion on the property’s “looks” or whether you’d want to live in it yourself.
By now you’d probably realise I’m a lot more interested in what the numbers say than how pretty it looks. Now, whilst it’s true that when I’ve bought something for me to live in I want to “love”, when I’ve bought any investment property  in the last 10 years there only one question I ask myself.

investment property calculator Does buying this property help me to reach my goal?

For me this is a simple Yes or No question. Does it get a tick?

How can you answer that question unless you have your own goal in sight.
I personally have a goal right now to grow my cashflow positive real estate portfolio. So for me it’s now easy. Before I even look at a picture or an address (well perhaps there’s streets and towns I’ll filter out!) I’ll want to know 2 things!

investment property calculator What’s the asking price?

investment property calculator What is the rental ?

To me these are also going to be questions that quickly help me answer the question – Is this a good property?

In fact you should write out a goal for the numbers you want your property to return before you even start looking.

For example, when I was in New Zealand with the team from Results Mentoring looking for cashflow positive real estate I set myself a goal to find properties under $140k that were returning a rental of over $220 per week. This was a simple filter to help me narrow my focus.I knew from my past experience at looking at the numbers that a property fitting this criteria would have  great chance of returning a positive yield after all expenses. In other words it would be cashflow positive property!

Here’s the actual numbers from my first NZ purchase

Gross Yield with the Investment Property Calculator

investment property calculator

 

 

The $117k was the actual purchase price (I started by offering $115k!). The $220 per week was the expected rental as quoted by the letting department from the selling agent and also verified by a second agency (one that I had already chosen to manage my property!) The gross yield of 9.8% gives a heads up that there’s a good chance the numbers will stack up in my favour!

Profit / Loss Caclulation with the Investment Property Calculator

Now, before we get too exited about our possible cashflow there are fixed expenses that we need to consider. These will all vary from location to location but he type of outgoings should be very similar for any residential rental property.

In my case the biggest recurring expenses to consider were:

investment property calculator Municpal Rates
investment property calculator Building and Landlord Insurance
investment property calculator Rental Agency Commission
investment property calculator Regular Maintenance

These things could be added to my investment property calculator to validate whether I would achieve my basic goal of income >> expenses.
Here’s an example of the actual numbers I used and the output of the investment property calculator for my first purchase in New Zealand in early 2012.

The numbers I input were based on a reasonable estimate of the expected costs. Rates and agency fees were pretty easy to obtain. Interest payments are computed based on your numbers. Insurance simply needed a basic quote. Maintenance was a pure estimate at this stage of the process, but the general “condition” of the property could be ascertained by a basic visual inspection.

 

investment property calculator

Here my numbers are encouraging. I should be able to return a profit based on initial assumptions.

Cashflow Position with the Investment Property Calculator

But we need to look a little deeper into the numbers. So far we are only looking at our expenses, but there is likely to be additional cashflow outgoing if we have a simple P&I bank loan. In my case I had decided to set-up a long term P&I loan rather than interest only so I wouldn’t have to worry about finance options in 3-5 years time. So here’s what my actual cashflow might look like.

investment property calculator So if I opt to have a 25 year P&I loan I will need to pay principal as well as interest. This is not an expense per se as we are adding to our equity, however, we do need to excess cash to the value of $238 to continue to fund the property. If I’m comfortable with the deal I will continue but I must be aware and be willing to choose to fund thus shortfall!

Cash on Cash Return with the Investment Property Calculator

Another factor I want to consider when making my investment decision is what is my rate of return. In this case I am really putting in a little over $25k of my own cash into the deal (assuming an 80% bank loan). With good management I can expect to make an actual return on the cash I put into the deal that beats the money I can get on deposit at the bank! If I was to use an interest only loan I would get a better than bank interest return on this deal!

Projecting forward Cashflow using the Investment Property Calculator

So how long will I have to fund my investment before the cash starts flowing towards me? In the investment property calculator you can make an allowance for expected increases for rental and property expenses. As the rental will be greater than the expenses then your net income will increase over time due to cost of living increases. Be conservative in your estimates. CPI numbers ought to be readily available. Whilst this is only a projection it will certainly help you to get a better understanding of the product what you’re investing in. I fully expect that after 5-7 years all my properties will have increased their rental and be throwing off cash for me to re-invest.

investment property calculator

 

And so in seeing a predicted profit on the basic numbers and expected positive cashflow after 2 years I have confirmation that there is a strong chance that if managed well this property can expect to return more than it costs. This is certainly not the end of my due diligence but simply the first pass on an extensive filtering system to ensure I stack the odds in my favour when making an investment of this size.

The investment property calculator is a simple but necessary tool to help my evaluate the property and answer the initial question?

Is this a good property?

I also use the calculator to help me negotiate my offer when dealing with the selling agent. I can say with confidence that if I offer any more money I would be better off leaving my cash in the bank and I’m not prepared to do that!

Oh, and by the way. I bought that property and after bedding down in the first year, doing some repairs and finding a tenant it now does return more than it costs each year. So Cashflow positive real estate here we come.

In my next article I’ll show you how I used the investment property calculator to save in excess of $20,000 from my first NZ property.

Until next time,

investment property calculator

investment property calculator

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