Using Cash on Cash Return (overseas investment properties) to Analyze Your Investment Property

October 30th, 2008 admin Posted in realestate |

By Scott Ficek

Each real estate investor uses their own unique set of ration to analyze investment property purchases. Some of those ratios include: Cash on Cash Return, Debt Coverage, Cap Rate, Gross Multiplier, and Return on Asset to name a few. Your financial goals, risk tolerance, and the type of property you are interested in with ultimately determin Which ratio you use.

Many of the required numbers for calculating Cash on Cash return are easily available in the field or on the fly, many investors will use this ratio as a quick test to determine if further analysis is required. It is an excellent indicator if the property is potentially under priced or a cash cow. Less seasoned investors may want to use a an on-line property analysis tool or property worksheet to do the work for them.

The math equation for Cash on Cash Return is Net Annual Cash Flow divided by Total Cash Invested. Let’s work through gathering the numbers.

First, calculate the Net Annual Before-Tax Cash Flow:

Calculate your yearly income from the property including rent and additional income such as laundry fees.

Total all yearly expenses that you pay as the owner/landlord such as:

Utilities (heat & electricity)

Water/Sewer/Garbage

Snow/Lawn Care

Management/Care taking

Insurance

Subtract the above yearly expenses from your above yearly income to arrive at your Net Annual Operating Income.

Next:

Calculate your mortgage payment using any on-line mortgage calculators. Multiply by 12 to get your annual mortgage payment.

Subtract your annual mortgage payment and your annual tax amount from the above Net Annual Operating Income to arrive at your Net Annual Cash Flow. Make sure you did not include taxes more than once!

Figuring your Total Cash Invested is easy. It is simply amount of money your used to acquire the property think down payment. Most investors will keep the math simplified by NOT including closing costs or other ‘acquisition costs’.

Last:

Calculate your Cash on Cash Return by simply divide Net Annual Cash Flow by Total Cash Invested. This percentage/ratio can used to compare even un-like investments. Looking at it simplistically, this number shows how much of your cash out of pocket is returned to you each year by this investment. Because this is a quick test, it does not take into account any tax implications, depreciation, or appreciation.

I recommend that you run multiple examples to become familiar with this ratio before making a purchase decision using it. You should also become comfortable with what level of Cash on Cash Return you are striving for. Many real estate investors are looking for at least a 24% Cash on Cash Return. Some will not even consider a property unless it produces a ratio of 30% or greater.

Scott Ficek owns and manages almost 30 investment property units from single family to multi-family. He is also a Minnesota MLS Agent with RE/MAX Advantage Plus in Minneapolis and helps new and seasoned investors buy and own Investment Real Estate.

How Property Management Can Landscape A Real Estate Rental And Improve Profits
By Christine OKelly

Property management experts sometimes get a beautiful real estate rental that is difficult to keep occupied and never seems to make an adequate profit. If you have one and wonder why, drive over and see what you notice about the exterior and the impression it gives you. Your target tenants might be approaching the apartment or house that sounded like Park Place only to find something different when they arrive. Landscaping may just be exactly what your rental property needs to attract the right tenants and reach profit goals. An investment like this doesn’t need to be huge to make a significant difference.

Decide What Goes

Property management needs to determine what elements are taking away from the value and overall look of the unit. It could be trim or a fence that needs paint, a dying bush by the front door, or an intimidating path that doesn’t do much to welcome visitors. Even just one of these things can make the building appear poorly maintained, even if it is perfect inside. See what others in the area are doing to make their homes appealing and note the style and feel of the neighborhood.

Deciding On Improvements

Color choices are an important element in landscaping for a profitable real estate rental. All of the paint, vegetation, and elements you select for the yard should fit into the area while still making your property stand out. Warm colors are popular for apartments and houses because of the welcoming feel they create. Texture and shape in vegetation and other components should add interest to the space and give the yard some life. For example, select a bush that blooms to frame in the yard and matching flowering perennials. Also, replace or repaint the front door to make it appear updated and match the rest of the design.

Components of the yard, like the path to the door, don’t seem that important until you make a slight change. Replace the material on short walkways with a different set of stones or new cement. Make longer paths into an interesting shape rather than sticking with the same straight walkway. Faux rock coating is perfect for updating the yard without spending a lot of money. Finally, property management can add accessories such as large planters, statues, or an old-fashioned yard light to polish the look.

Save On Long Term Expenses

Sometimes property management expertly improves the landscaping and visual appeal of a real estate rental, but turns a good investment into a bad one in the process. How? Adding high maintenance elements that require a large amount of time and money to upkeep adds to the initial cost, making it a bad investment choice. When undertaking a project like this, make your choices carefully. Low maintenance vegetation that matches your region is necessary to save time and materials. For example, you can select perennials instead of annuals, mulch or filler plants to eliminate weeds, and drought resistant species to keep water costs down. For an apartment or condo building, save money on utilities by adding coniferous trees to block the sun in the hot weather and let in the sunshine in the colder months.

Potential tenants will assess the real estate rental within seconds of seeing it on the street. This makes it extremely important that their first impression is a positive one that invites them to see what else the real estate rental has to offer. Landscaping doesn’t have to be a large investment for the property management to notice the difference. Even the smallest changes can improve the building’s bottom line and get you on the way to success.

Christine O’Kelly writes for Beal Property, LLC, a Chicago property management company. Beal Properties Chicago has managed several real estate rental properties in the historic lakeside neighborhoods for more than 80 years.

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