How to calculate investment rate of return?

[godette]

Hello all. Can anyone tell me how an investment's rate of return is calculated? We were told that unless we can see a 20% IRR in a property over 7-10 years, it's not worth it.

My husband and I are looking at purchasing a three bedroom property about 8km from the city that's about 12 years old, for $340K. We're looking at getting 100% financing. It can be rented out at $350/week. I reckon that in seven or 10 years, it would be worth about $500K? (Rough guess). Property is in Perth.

How would I work out a rate of return on it? Thank you very much

 

[Propertunity]

Do a google search: site:somersoft.com "IRR"

Lots of threads there where it has been discussed before.

 

[godette]

Do a google search: site:somersoft.com "IRR"

Lots of threads there where it has been discussed before.

Hello, I've tried doing the search for IRR but cannot find an answer anywhere. Please help. Thank you.

 

[redwing]

Hi Godette

Taken from Propertunity's assistance to you above

Internal Rate of Return link

If you disappear down the rabbit hole whilst on this journey though, the PIA Software by Somersoft (the hosts of the forum) is a great tool which includes IRR and may assist with your projections/expectations?

Property Investment Analysis Software - link look at General Information etc to review

 

[BayView]

Hello all. Can anyone tell me how an investment's rate of return is calculated? We were told that unless we can see a 20% IRR in a property over 7-10 years, it's not worth it.

My husband and I are looking at purchasing a three bedroom property about 8km from the city that's about 12 years old, for $340K. We're looking at getting 100% financing. It can be rented out at $350/week. I reckon that in seven or 10 years, it would be worth about $500K? (Rough guess). Property is in Perth.

How would I work out a rate of return on it? Thank you very much

cash used = $0 (100% finance; does this include purchase costs such as loan costs and stamp duty?)

If so; IRR = $infinity.

But say you had to whack in $10k of your own hard earned.

$10k cash.

Property bought for $340 (not allowing for purchase costs).

In 10 years property is worth $500k, and along the way it is cashflow neutral - no money going out of your pocket or going in.

cap growth = $160k.

Divided by 10 years = $16k per year.

IRR per year on your $10k per year is 160% per annum.

Now, let's be realistic;

Purchase = $340k purchase costs = 5% = $17k = $357k.

Purchase costs are from your cash = $17k.

rent is $350p/w = 5.09%.

Loan Interest costs 7% = $23800.

Nett rent (after all other holding costs - 20% of rent are deducted) = $18200

Neg cashflow = $5600.

After tax return of $5k your neg cashflow is $600p/y x 10years = $6,000

cap gain = $143k, minus $6k for neg cashflow = $137k or $13.7k per year.

IRR on $17k = 80.5% per year.

( I think that's right)

 

[Dazz]

Hi Marc,


I think you've over estimated the cashflow. It's more negative than that.


Gross rent = $ 18,200 pa. (best case scenario)


Outgoings in WA are high....our SRO loves its land tax. You've assumed 20% of gross rent for everything. Standard PM fees are 9.35% alone.


Nett rent = 75% of gross rent = $ 13,650 pa.


Nett pre-tax cashflow loss = $ 23,800 - $ 13,650 = roughly 10K pa.


Tax return of 5K pa if the owner is in the highest tax bracket.


Nett after-tax cashflow loss = 5K pa, or $ 100 pw. Over 10 years it is 50K, although with rent increases (hopefully but not assured), that loss would be down to about 40 or 45K over the 10 year period.


....another classic example of an "asset" never actually paying it's own way. The Owner shall forever be chipping in to support it.


It would need to rent (gross p.w.) for something like $ 560 pw to be cashflow nuetral....i.e. the Owner makes nothing. Good luck getting renters to pay that for some 3 bedroom place that's 12 yo. They simply will not.