Making an educated and informed decision about your real estate investments can make all the difference between a profitable asset with a great return on investment (ROI) versus an investment property that ends up costing you money.
To best determine if an asset is profitable for you, calculate the yield and make sure to account for all the factors that go into this equation. One common mistake of investors is to accidentally leave out an expense that ends up eating away their profits and drastically decreasing their anticipated yield and cash-on-cash returns.
Prepare yourself the best way possible by accurately calculating your property’s yield and cash-on-cash returns before purchasing the property.
How to Accurately Calculate a Property’s Yield
While each property is a little bit different, the basic equation for calculating the yield is as follows:
Annual Income: The annual income calculated from the rent generated on the rental property (often referred to as the gross rent), and then subtracting vacancies.
Expenses: The expenses on your rental property typically include: mortgage payments, taxes, insurance, asset management fees, homeowners’ association fees, maintenance, and leasing fees.
Equity Build: The equity build is made up of the principal pay down which comes from the rent collected that is then used to pay the mortgage.
Total Investment: The total investment is composed of the down payment, closing costs (typically 1.5% of the purchase price), rehab costs, loan costs (about 2% of the loan value), and the acquisition fee (3.5% of the purchase price).
Next, Calculate Cash-on-Cash Returns
There are several metrics you can use to determine the overall profitability on your investment. While cash flow is one way to do that, many investors also look at the potential cash-on-cash return.
Cash Flow ÷ Investment Amount = Cash-on-Cash Returns
HomeUnion calculates the cash-on-cash return as the annual cash flow divided by the investment amount. Essentially the cash-on-cash return is a way of looking at what you got out of the property in relation to what you put into it. Instead of being expressed as a dollar amount, the cash-on-cash return is a percentage. Using this formula can help you compare multiple properties and locations, to determine where to invest in income properties.
The Simple Way to Evaluate Properties
As you can see, there are many factors to consider when investing in an income property. Making sure you account for all the factors is essential in determining if an investment property is right for you. Performing all the calculations on your own can be headache-worthy, but that’s why there is an easier way.
Every property featured on HomeUnion’s platform comes with yield and cash-on-cash return numbers already calculated, so you can evaluate multiple properties and locations across the United States with ease.
At HomeUnion, we act in full transparency at all times, and this includes the projections we prepare for you. Our projections take into account real life factors, like repairs and maintenance happening from time-to-time and a contingency for vacancies between tenants. Our goal is to provide you an accurate projection of the returns you will be receiving over the whole lifecycle of the asset.
Questions to Ask a Property Management Company
While our goal at HomeUnion is to give you a realistic projection on the returns of your investment properties, many companies often leave things out like vacancies, fees, and maintenance. By neglecting these expenses, the yield and cash-on-cash returns are over inflated projections.
So before you make a decision on who you’ll partner with, you should consider some of the following questions when evaluating a company’s projections:
- Are vacancies included in the projections?
- Are rehab costs factored into the yield? Or separate?
- Does the cash flow account for fees, maintenance and other expenses?
- What factors are used to calculate the yield?
- Is the cash-on-cash return an accurate percentage?
If you want to learn more about how HomeUnion calculates yields or have any questions please give us a call at 888-276-0232 or sign up for a consultation on your own schedule.