Invest to financial freedom - Formulas for investment success
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Otesa Middleton Miles from Bankrate.com shares with us some of the formula that we might use to be success in real estate investment. So let’s see what his formula about :
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Cash-on-cash return
Boaz Gilad, investor and author of the book “ The Real Estate Millionaire: How to invest in rental markets and make a fortune†uses this formula to access the investment potential.
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Formula : (Cash in - cash out) / down payment = cash-on-cash return.
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Cash in : cash the property expected to bring in annually
Cash out : expenses such as mortgage payments, repairs, insurance, etc.
Down payment : total amount invested
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Gilad’s advice : Don’t buy if the cash-on-cash return is lower than 3 percent and look for rate above 6 percent.
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After-repair value
Doug Crowe, president of Springboard Group use this formula for short-term investment.
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Formula :
- The purchase price should be no more than 65 percent of the after-repair value of the property.
- (75 percent of your after-repair-value) - (repair expenses) = purchase price
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Capitalization rate
Doug Crowe also use another formula called Capitalization rate for long-term investment.
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Formula :
Annual rental income(income-expenses, not including mortgage)/ the purchase price = capitalization rate.
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PS : High capitalization rate will help the buyers while low capitalization rate will help sellers.
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PS: Capitalization rate very depends on the area you invest in.
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Source : Bankrate.com
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The cash on cash rate formula is not very good as it will depend on the terms of the mortgage (an interest only mortgage will give you a much better cash on cash return than a short term P+I mortgage) and how high you gear (a small deposit will inflate the number produced by the formula). I prefer the cap rate approach.
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