Hi All
I have had some private messages asking me how I calculated the Gross Yield, Net Yield, and Return on Investment (ROI) as part of assessing the initial financial merits of this deal.
I hope this is of some help to other forum members.
Here goes:
GROSS YIELD
Where Gross Yield
= Annual Income / Investment cost
Calculation
Annual Income
= (Weekly Income per unit * No. of Units) * 52 weeks
= ($110 * 5) * 52
= $28,600
Investment Cost
= Purchase Price plus Costs
= $490,000 + (490,000 * 5%)
= $490,000 + 24,500
= $514,500
Gross Yield
= Annual Income / Investment Cost
= $28,600 / $514,500
= 5.6%
NET YIELD
Net Yield = Annual Income less Costs / Investment Cost
Annual Income
= $28,600 (as above)
Annual Costs
= Annual Income * 30% + Loan Repayments
= ($28,600 * 30%) + $27,714
= $8,580 + $27,714
= $36,294
Loan Repayments
= Loan Amount (80% of Purchase Price) * Interest Rate
= ($490,000 * 80%) * 7.07%))
= $27,714
Net Yield
= Annual Income less Costs / Investment Cost
= (($28,600 - $36,294) / $514,500)
= $(7,694) / $514,500
= (1.5)%
RETURN ON INVESTMENT
Return on Investment =
(Growth from Investment in YR1 + Annual Income) / Initial Capital required
Growth from Investment in YR 1
= Future Value of the Investment Assumming a rate of growth of 8%
= FV(Interest Rate, Period, Payment, Present Value)
Where
Interest Rate = 7.07%
Period = 1
Payment = 0
Present Value = Purchase Price = $490,000
Formula in Excel is
= FV(8%,1,,-490,000)
= $529,200
Therefore Growth in Yr1
= $529,200 - $514,000
= $14,700
Annual Income
= $28,600
Intial Capital Required
= Deposit plus costs
= $122,500
Therefore Return on Investment
=(Growth from Investment in YR1 + Annual Income) / Initial
Capital required
= $14,700 + $28,600 / $122,500
= $43,300 /122,500
= 35% ROI
PAYBACK PERIOD
Payback Period = Number of Yrs required to recoup inital investment
Payback period
= $122,500 / $43,300
= 2.8 years
Therefore inital investment cost of $122,500 will be recouped in 2.8 years.
Summary of the Purchase at $240,000
Now that we know Iggy purchased at $240,000 and the investment is now worth $450,000 (per the valuation) the numbers start off and end up looking something like this:
Purchase Price = $240,000
Costs = $12,000
Deposit = $60,000
Loan = $192,000
Rent = 5 * 2BR @ $110 = $550
Costs per week @ 30% = $(165)
Loan per week @ 7.07% = $(261)
Net Profit per week = $124
Gross Yield = 11.3%
Net Yield = 2.6%
Growth in Yr 1 = 88%
ROI Yr1 = 378%
Assume $20,000 spent on Strata and Improvements
Capital Gain = $410,000 - $240,000 - $12,000 - $20,000
Capital Gain = $138,000
Tax on Capital Gain @ 48.5% = $66,930
Net Gain = $71,070
Real Return on Investment after taking into account tax and costs
= Net Gain / Intial Capital Required
= $71,070 / $60,000
= 118%
Overall this was a great purchase for Iggy and the jury is still out for Iggy's new purchaser. The other point, if this deal had of been looked into further then the prospective purchaser would have weighed up all the assumptions used above and determined the likely hood of increasing. As an eg, we have used actual rents but we now know that rents maybe could be higher. We have used conservative growth of 8%, when the property has actually increased a huge 88%. There are a number of variables which required testing.
Hope this is of some use to forum members
Cheers
Corsa
