If you want to know how to crunch the numbers and work out how much an investment property is worth then it is worth watching this video. It shows you the calculations you can use to work out if any property is a good buy for you.
Newbies, as well as seasoned investors might find this interesting, and learn how to evaluate their own properties with this methodology. Below the movie are all the figures.
Now, here's an appraisal calculation example
All calculations follow the numbers in the movie, refer there for any calculations.
Calculate the Net Operating Income
Selling Price of $900,000
Scheduled Rental Income of $60,000
Effective Rental Income (-3%) of $58,200
Expenses
5% for maintenance costs $2,910
5% for Management costs $2,910
Other expenses, Taxes, Insurance, Water & Sewer $15,000
Total Operating Expenses are $20,800
Net Operating Income is $37,380 (58,200 - $20,820)
Financials, using calculations in video
Cap Rate is 4.15%
Operating Expense Ratio is 35.8%
Sold for 15 times gross income
Sold for 24 times net income
Determine the Return on Investment
Going in with 35% downpayment is $315,000
Mortgage of $585,000 at 3.5% over 25 years
Annual debt service (mortgage payments) $35,052 for the year
Return on Investment and Profit and Loss
NOI is $37,380, minus the mortgage payments gives a positive cash flow of $2,328 per year for this example sale.
Return on Investment here is 0.74%
Value of the building is $911,707
And just so you can compare the above value, if we had a higher income of $45,000 and the Cap Rate was lower, at 3.5%, the Value would be $1,285,714.
The lower the Cap Rate is, the more valuable that property tends to be, and with a higher Cap Rate you're usually looking at a higher risk on your investment, could be that the building needs work, there's deferred maintenance or even the neighbourhood it's in can affect the value.
In this example, it's great, we are making money, with a positive cash flow, and you also generate wealth by paying down the mortgage on the property and also the value of your property will increase as time passes.
** Some appraisal firms use maintenance costs of $500 per unit. A fixed percentage of 5 % is most commonly used.
