Rate of return calc
- Thread starter Raphael
- Start date
Picky, picky
I agree - I use 50. I also include management fees, BC, insurances, etc, for net calcs.
However, the OP asked for "simple" - I assumed gross return and I gave simple!
And if one wished to be extremely accurate, there are 52.14 weeks in a year (or 52.28 for leap years)!
I agree - I use 50. I also include management fees, BC, insurances, etc, for net calcs.
However, the OP asked for "simple" - I assumed gross return and I gave simple!
And if one wished to be extremely accurate, there are 52.14 weeks in a year (or 52.28 for leap years)!
Haha! I never thought of the 52.14 weeks thing.
Another really, really simple thing I like to do that is equivalent to calculating gross return is just to look at the multiplier between the purchase price (in $k) and rent (in $ pw). I like to aim for a multiplier of about 1.5 ie. buy a property of $200k, rent for $300 pw. Great for quick calcs when you are just looking on domain or realestate.
Another really, really simple thing I like to do that is equivalent to calculating gross return is just to look at the multiplier between the purchase price (in $k) and rent (in $ pw). I like to aim for a multiplier of about 1.5 ie. buy a property of $200k, rent for $300 pw. Great for quick calcs when you are just looking on domain or realestate.
That calc gives you about 5% gross (5.2% to be more precise), which is often considered a "typical" gross return from residential real estate. So it's easy quickly to calculate gross returns compared on "typical" returns.
Roughly:
$400k/ 200pw = 2.5%
$400k/ 400pw = 5%
$400k/ 600pw = 7.5%
$400k/ 800pw = 10%
Extrapolate as required based on your purchase and expected rental.
For something a little more involved, this is what I taught a guy recently with dyslexia.
think of purchase price as $100, and deal in %s of that.
in costs 4% (may be 5% for some states)
add 1.5% if LMI
add 2.5% if Buyer's Agent
interest = whatever x lvr, say:
100% lend = 8%
75% lend, 8*3/4 = 6%
80% lend, 8*8/10= 6.4%
other holding costs = 1.5%
First year, cost is :
in costs + total holding costs
= 4+8+1.5 = 13.5%
Following year costs.
8+1.5% = 9.5%
Now that you've got those figures, just multiply by the number of 100s in your purchase price = 4000
yr 1 : 13.5 * 4000 -> 4*13+4*0.5 -> 54*1000 = $54000
yr 2n : 9.5 * 4000 -> 4*9+4*0.5 -> 38*1000 = $38000
For income, some people find it easier to divide weekly rent by 2 and add 2 zeroes.
500 / 2 = 250 and add two zeroes = 25000pa.
yield is 25000/400000 which reduces to
25/400 = 25/4 *1/100 = 6.25/100 = 6.25%
think of purchase price as $100, and deal in %s of that.
in costs 4% (may be 5% for some states)
add 1.5% if LMI
add 2.5% if Buyer's Agent
interest = whatever x lvr, say:
100% lend = 8%
75% lend, 8*3/4 = 6%
80% lend, 8*8/10= 6.4%
other holding costs = 1.5%
First year, cost is :
in costs + total holding costs
= 4+8+1.5 = 13.5%
Following year costs.
8+1.5% = 9.5%
Now that you've got those figures, just multiply by the number of 100s in your purchase price = 4000
yr 1 : 13.5 * 4000 -> 4*13+4*0.5 -> 54*1000 = $54000
yr 2n : 9.5 * 4000 -> 4*9+4*0.5 -> 38*1000 = $38000
For income, some people find it easier to divide weekly rent by 2 and add 2 zeroes.
500 / 2 = 250 and add two zeroes = 25000pa.
yield is 25000/400000 which reduces to
25/400 = 25/4 *1/100 = 6.25/100 = 6.25%
Ok
Thanks all.
So, im thinkin out aloud here and will probably embarass myself by showing my total ignorance...
In real simple terms, if I borrow my $400k @ 6.25% and rent out at $500 pw, (6.25% yeild thanks winston), Im breaking about even re interest only re-payments?
I wont need my neg gearing income tax deductions to hold this prop long term?
I cant be right, this sounds too simple.
Thanks all.
So, im thinkin out aloud here and will probably embarass myself by showing my total ignorance...
In real simple terms, if I borrow my $400k @ 6.25% and rent out at $500 pw, (6.25% yeild thanks winston), Im breaking about even re interest only re-payments?
I wont need my neg gearing income tax deductions to hold this prop long term?
I cant be right, this sounds too simple.
yes, in real simple terms...
Expanding on that though, you need to also account for
management fees
body corporate fees
water rates
council rates
insurances
land tax
maintenance/repairs
possible vacancies
they all add up to a fair sum over the year, to the extent where a positive geared/neutrally geared investment turns into a very negative geared one so IMHO it is a good idea to arrive at a figure that you think will cover all of these and use that in with your quick calculation...if you don't - you will be kidding yourself as these things are real and won't go away.
Different story if you're thinking commercial though...
Boods
Thanks Boods
yes, in real simple terms...
Expanding on that though, you need to also account for
management fees................None, I manage.
body corporate fees.............None
water rates........................yep
council rates......................yep
insurances.........................yep
land tax............................Big yep
maintenance/repairs............a little
possible vacancies..............yep
Boods do you have a preference for commercial?
yes, in real simple terms...
Expanding on that though, you need to also account for
management fees................None, I manage.
body corporate fees.............None
water rates........................yep
council rates......................yep
insurances.........................yep
land tax............................Big yep
maintenance/repairs............a little
possible vacancies..............yep
Boods do you have a preference for commercial?
simple formula;
add 5% for purchase costs.
Then, multiply this amount by your interest rate; $420k x 7% = $29400 p/a.
Divide by 52 for weekly cost of finance = $565 p/w.
expect 20% of rent to be eaten by costs. This allows for 2 weeks vacancy as well.
$500 x 20% = $100.
nett rent is more likely to be around $400 p/w.
On a 7% IO loan, you'll be out of pocket about $165 p/w before tax return.
Of course, if you are on less interest and have no vacancies, your out of pocket may drop to say; $100 p/w?