17.91% yield/ 22.47% yield - Posted by John Behle
Posted by John Behle on October 25, 1998 at 17:35:00:
Your cash flow is worth between a 17.91% and 22.47% yield. That’s just the cash flow alone. Without your prices, holding period, expected appreciation, etc. it is impossible to show a more precise rate of return.
If you plug those factors in, your yield of course will be higher. So, plug in the cost of the property and any fix up or other costs. Project the cash flow out for the period of time you plan to own it plus rent increases and less expected expenses. Add in major repairs expected in future years (i.e. new roof, furnace, water heater, etc.) Figure those cash flows in with your tax rate. Add in depreciation. Project it out to the time period you plan to sell and you have it.
You then bring all the cash flows to a net figure on a monthly basis. Add in a sinking fund rate for money needed for future repairs or expenses. Add in the reinvestment rate for the money as it is received. Then you have your true rate of return called the “FNMR” or Financial Management Rate of Return (provided your assumptions are correct).
Sound complicated? Well ya, it is a one week course (CI101) through the National Association of Realtors, but it sure works well.
But what do you compare it to?
What would you do with the 20-25K? How much could it turbocharge your investing? Or, are you doing nothing down type deals that don’t need cash?
If that money will bring you over a 25% rate of return wherever you put it, by all means. Yet, you don’t need to sell to get the money out.
You can finance that equity out with a second and still have the rental. You can use that equity to buy other properties. For example, create a second against this property as a portion of the seller financing on the next deal you buy. You can “liquidate” your equity and profits without having to sell the property.
Just some things to think about.