How do decide which Investment Property?

From: Michael Yardney


Yesterday I received an email from a reader of this forum asking how to choose between 3 different properties each with different attributes. I am publishing my reply here because it pays tribute to the excellent program written by the convener of this forum –Jan Somers and also because my response may be of interest to others, but particularly because it could start an interesting thread of discussion……..
“SO many choices – I understand it’s often hard to make a decision and choose between one property compared to another. In general I look for capital growth in preference to purely high income return (even though return is important - it pays the mortgage.) But capital growth is where you make the big money and its tax free (until you sell and you probably shouldn't.)
The way I assess one property against another is to put the data into Jan Somers' PIA Pro software program. It’s definitely worth buying.
Putting in all the assumptions the program spits out a figure called the Internal Rate of Return. The IRR takes into account capital growth, rental income, depreciation and tax benefits. It also takes into account the time value of money. That means... $10,000 today is worth more than $10,000 in 5 years time.
It's a little technical but it's an excellent way to compare one property against another.
The trick is ...the results are only as good as the assumptions you put into the computer program
Have a great week.....make it a great week.
Michael Yardney Metropole Properties myardney@metropole.com.au”
 
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Reply: 2
From: Paul Zagoridis


For the technical ...

The Internal Rate of Return (IRR) is that rate where the Net Present Value (NPV) of a series of cashflows (in and out) is equal to zero.

In other words... If I start with $0 what does this investment mean to me in % terms TODAY.

Dreamspinner
 
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