Cash on Cash Method - calculating returns on Property

How can you get a positive NPV applying a discount rate of 15%... when the IRR is only 12% and 8%?

(I'm not an accountant).

Btw. Yes - Option 1 is a better deal.

 

I understand you are attempting to demonstrate this return method but aren't you just giving us two completely different scenarios?

Are we just confusing the issue?

(Income etc + end sale price) - total costs = profit ?

 

All too numbery for me. I want to make 3,4,5,600k+ per deal in a reasonable amount of time with minimal capital put it. That's it for me.

 

This goes to the heart of strategy. For example, do you:
a) Buy 10 of Option 1 IP's; or
b) Buy 4 of Option 2 IP's?

The capital outlays and the cash used are the same... But what gives you a better return?

 

Assuming EVERYTHING else is equal - I would go with purchasing x4 properties rather than x10 properties. Purely due to the ease of managing 4 rather than 10.
However, everything is never equal... so it depends.

Even in the example, the results arent equal, so I would go with the one with the better returns.

Its all hypothetical mumbo jumbo though and the answer will always remian..."it depends"

Blacky

 

Precisely.

 

When I started investing in property 12 years ago, my strategy was to buy in low socio-economic suburbs, development blocks with subdivision potential. Bought 8 IP's in 2 years. For the same capital outlay, I could have purchased 2 IPs in top tier upper class suburbs.

I reckon the returns on my applied strategy was much greater than buying in upper class suburbs.

 

Easy to tell in hindsight which way it went, but it may not have.

And some people simply don't have the resources to buy top tier suburbs, so have to make do with lesser ones regardless of which is better.

 

The big boys in large corporations and the investment community allocate capital using rigoroua financial analysis. Investing in property should be exactly the same.

You asked the question - is it better to do one $20m development, or 3 developments totalling $20m. Doing a discounted cash flow on the various options will tell you the answer.

 

I fixed that for you.
Like all measures discounted cash flow will only tell you a part of the story. It doesnt paint the full picture - and no one measurement will.

Blacky

 

Agreed @Blacky - it comes down to all of the information around the investment.

30% IRR may sound great but if it takes 5 years to realise vs only 20% on a smaller project but a two year turn around may also tick a few boxes as well.

 

@Scott No Mates @Blacky I agree. When it comes to looking at a deal there is no formula or 'one fits all' that can tell you what to do. There are often so many variables and ways a deal can be structured. Eg my Brisbane home Tobe developed, for the average buys and hold person or probably seems like a bad deal, low yeild, cash drain 100 a week , some costly repairs etc. But when you look at the deal through the lense of a different strategy eg subdivide and sell or subdivide, build and sell then the deal outcomes changes significantly and the short term loss suddenly becomes easily justifiable. So no one formula to apply to any deal.

 

Done - modified original post

 

you buy where-ever you can afford when trying to invest although different states, suburbs may have different scenarios. For e.g just a straight buy hold blue chip suburbs have outperformed non-blue chip suburbs in the Melbourne example. for e.g. a doncaster east house sold 2.5-3 years ago at 750k vs 2 houses in western suburb of pt cook was build for ard 365k. Now the doncaster east house is worth close to 1.2 mil and the pt cook houses are worth maybe 440k. Hence the cg is 450k vs 170k. Again different states are different what might work in Sydney maynot work in Melbourne and what might work in Melbourne might not work in Brisbane.

Any potential sub divisional ip will outperform cg of a single ip site without sub div potential.

 

Then you've got that the rental yield is probably considerably better on the two cheaper properties, quite possibly cf+ even compared to generally leaking money on a 750k house, still not going to make up the capital gain if that's your game.

As has been said, it really does all depend on your strategy and end game, which again is why having a well defined strategy before you even start is such a crucial step to success (a valuable life lesson in just about everything!). As the saying goes... failing to plan is planning to fail.

 

In the words of the Underpants Gnomes (from Southpark) "Underpants, profit".

What 'South Park' Can Teach You About Business -- Hint: Stealing Underpants Isn't Enough

 

How does this work if the initial costs are drawn from a loan? Then in theory the initials cost is zero. And so you get a division by zero error. Or infinite roi if you prefer.

I would have thought (as a newbie) that the main growth constraint for most investors is access to credit.

Wouldnt be better to look at the return on the net credit (credit required for all expenses minus new credit available post deal due to increased equity and rent)?

 

Hi Guys,

In my opinion, NPV and IRR methods are not so useful in Property Investment. This because the last period cash flow is dis-proportionally large and virtually unpredictable.
It is somewhat more useful in deciding when to sell a property, i.e. at what price point the IRR is closest or exceeds the investor's required/desired rate of return.

Cheers

 

true both properties in pt cook worth 380 per week (out of 3 years would be 118K) while doncaster east would be 450 per week (out of 3 years gross rental would be 70K) hence difference is about 48K give or take which still outweighs it by 120K from a total return perspective.

 

This is to calculate if your investment is performing.

If you draw down costs from a loan you are still paying interest which is dedeuctible even from a PPOR you just have to apportion it properly.

In the end it is answering is the property I bought performing or would I have been better off putting it in another place. That is all.