Hi all, curious to understand / learn how others calculate ROI on an IP. I am starting to focus MORE on cash on cash return vs Gross or Net Yield. Is this what others are also doing ? Here is what I am doing - Gross Yield = Weekly Rent x 48 weeks (allowing vacancy) / Purchase price Net Yield = Weekly Rent x 48 weeks (allowing vacancy) - expenses / Purchase price Cash on Cash return ( a little more involved) 1. Calculate annual interest rate cost (loan x % interest rate) 2. Calculate Net Yield as above 3. Calculate upfront costs (how much of your cash used ie- Deposit, Stamp Duty, legals, etc) 4. Divide Net Yield over upfront costs. Best scenario on cash on cash return for an IP I have worked out so far (assuming a 6% interest rate) is 4.72%. Open to any comments or thoughts here.
In reality ROI should consider the total CASH outlay (ignore loan proceeds). But the issue with such a calculation is it should be used alongside another for net equity. Net equity is the difference between the present value less expected selling costs, the loan to be paid out, expected tax and it indicates what value is realised in the event of a sale. Its a good indicator of what your ïnvestment really is. We too often see people mention their $2.5m portfolio... Except their net equity is $500K. Your investment value is really only what you can walk away with
I think you might mean Paul? I certainly have some rules of thumb by which I assess properties, but it's not a formal method.
Similar to above comments, but I use 50 weeks a year, unless IP is, or is in a difficult to rent location, 4 weeks every year seems a bit high for vacancies etc.
Why not compare all of those (and more) metrics on each property you analyse? (i find net yield the most useful to compare b/w properties of the 3)