Post to SinFongChanRE.Wixsite.com on 14/3/2018 2:04 AM
Commenting on “How I generate very satisfactory Return On Investment (ROI) in my real estate investment”
About 2 decades ago, an acquaintance mentioned about his investment in Cranbourne. It was leased to a hair dresser saloon and he was getting a very good return.
Although weekends were precious little time for my wife and I, because we were still very busy working full time, we still drove to various towns and outer suburbs to check out properties. We did not have much spare cash because of other financial commitment. However, we had paid off our mortgage by then.
We drove to Hastings, Red Cliff, Balnarring Peninsular, Dromana, Rosebud, Morwell, Inverloch, Wangthaggi, Phillip Island, Ballarat, and Geelong. We normally just walked around the main streets in the town centres, or sat on a park bench and enjoyed our home-pack lunch. In a couple of instances, we walked into a real estate agency and asked anyone on duty to show us some properties on sale. We made very clear that we were not serious to purchase yet. So far, we had not bought a property in any of the town mentioned.
It was until about 12 years ago, we finally paid a visit to Cranbourne, about 50 km southeast of Melbourne CBD or 30 km from home. We had no idea what to expect because we knew nothing about the suburb. Upon arrival of Cranbourne, we drove rather aimlessly checking out the surrounding. We finally parked our car outside a real estate agency, and dropped in to have a chat with a sales staff who was on duty. I asked about the area, approximate property price of a 3-bedroom house, and the monthly rental. The information I got back was what I would consider as good.
When I left the agency, I took a pamphlet from a rack outside. We found a property we could visit but the open-for-inspection (OFI) would be over in just 15 minutes.
The sky turned dark fairly early, the lighting in the property was rather dim. However, I could recognise that it had been renovated recently, and decorated fairly “tastefully”. Unfortunately it was priced above our target range, so we did not pursue further and walked out. The young salesperson in charge of the OFI caught us in time, and suggested that there was another property close by worth considering. It had a granny flat at the back, and was currently rented out. The front was vacant then, and if rented, the combined income would be generating positive return from day one - that depended on whether the agency could find a tenant before settlement date.
It was difficult to inspect a property in detailed, but It did not take us more than 20 minutes to decide to buy the property. The mathematics showed a good return on investment.
Fast forward 12 years later, a nearby property sold recently at a price well beyond my imagination. The property sold price is two and half times the original purchase price. The mortgage payments throughout these years covered fully by the rental income.
Let me show you the mathematics about the investment. This does not take into consideration of opportunity loss on the initial capital outlay, which is 10% of the purchased price. Excess income from rental is also ignored in the calculations.
For ease of calculation, the purchase price is assumed to be $200,000.
Case 1
Purchase price = $200,000
Sale price = Purchase price x 2.5 = $500,000
Gross profit = Sale price - Purchase price = $300,000
Capital outlay = Purchase price x 10% = $20,000
Return on investment (ROI) = Gross profit / Capital outlay
= $300,000 / $20,000 x 100%
= 15 x 100% = 1,500% or 15 times
Assume if I had to spend extra $20,000 to maintain/update the property
Return on investment (ROI) = Gross profit / (Capital outlay + Maintenance)
= $300,000 / $40,000 x 100%
= 7.5 x 100% = 750% or 7.5 times
Case 2
What if the property is sold for $550,000, can you calculate the ROI?
Gross profit = Sale price - Purchase price = $350,000
Return on investment (ROI) = Gross profit / Capital outlay
= $350,000 / $20,000 x 100%
= 17.5 x 100% = 1,750% or 17.5 times
Assume if I had to spend extra $20,000 to maintain/update the property
Return on investment (ROI) = Gross profit / (Capital outlay + Maintenance)
= $350,000 / $40,000 x 100%
= 8.75 x 100% = 875% or 8.75 times
What I have not mentioned is that 12 years ago, I could borrow 105% from the bank, which means I borrowed every cent of the purchase price, plus stamp duty, all fees and charges. The rent received covered all the mortgage payment, which means a gross profit is between $300,000 and $350,000 in 12 years.
Property investment is for long term, and one should not sell it for a quick gain, unless in financial trouble.
I am not a qualified investment adviser; so do consult one should you include property investment in your investment portfolio.
Thank you for reading.
Commenting on “How I generate very satisfactory Return On Investment (ROI) in my real estate investment”
About 2 decades ago, an acquaintance mentioned about his investment in Cranbourne. It was leased to a hair dresser saloon and he was getting a very good return.
Although weekends were precious little time for my wife and I, because we were still very busy working full time, we still drove to various towns and outer suburbs to check out properties. We did not have much spare cash because of other financial commitment. However, we had paid off our mortgage by then.
We drove to Hastings, Red Cliff, Balnarring Peninsular, Dromana, Rosebud, Morwell, Inverloch, Wangthaggi, Phillip Island, Ballarat, and Geelong. We normally just walked around the main streets in the town centres, or sat on a park bench and enjoyed our home-pack lunch. In a couple of instances, we walked into a real estate agency and asked anyone on duty to show us some properties on sale. We made very clear that we were not serious to purchase yet. So far, we had not bought a property in any of the town mentioned.
It was until about 12 years ago, we finally paid a visit to Cranbourne, about 50 km southeast of Melbourne CBD or 30 km from home. We had no idea what to expect because we knew nothing about the suburb. Upon arrival of Cranbourne, we drove rather aimlessly checking out the surrounding. We finally parked our car outside a real estate agency, and dropped in to have a chat with a sales staff who was on duty. I asked about the area, approximate property price of a 3-bedroom house, and the monthly rental. The information I got back was what I would consider as good.
When I left the agency, I took a pamphlet from a rack outside. We found a property we could visit but the open-for-inspection (OFI) would be over in just 15 minutes.
The sky turned dark fairly early, the lighting in the property was rather dim. However, I could recognise that it had been renovated recently, and decorated fairly “tastefully”. Unfortunately it was priced above our target range, so we did not pursue further and walked out. The young salesperson in charge of the OFI caught us in time, and suggested that there was another property close by worth considering. It had a granny flat at the back, and was currently rented out. The front was vacant then, and if rented, the combined income would be generating positive return from day one - that depended on whether the agency could find a tenant before settlement date.
It was difficult to inspect a property in detailed, but It did not take us more than 20 minutes to decide to buy the property. The mathematics showed a good return on investment.
Fast forward 12 years later, a nearby property sold recently at a price well beyond my imagination. The property sold price is two and half times the original purchase price. The mortgage payments throughout these years covered fully by the rental income.
Let me show you the mathematics about the investment. This does not take into consideration of opportunity loss on the initial capital outlay, which is 10% of the purchased price. Excess income from rental is also ignored in the calculations.
For ease of calculation, the purchase price is assumed to be $200,000.
Case 1
Purchase price = $200,000
Sale price = Purchase price x 2.5 = $500,000
Gross profit = Sale price - Purchase price = $300,000
Capital outlay = Purchase price x 10% = $20,000
Return on investment (ROI) = Gross profit / Capital outlay
= $300,000 / $20,000 x 100%
= 15 x 100% = 1,500% or 15 times
Assume if I had to spend extra $20,000 to maintain/update the property
Return on investment (ROI) = Gross profit / (Capital outlay + Maintenance)
= $300,000 / $40,000 x 100%
= 7.5 x 100% = 750% or 7.5 times
Case 2
What if the property is sold for $550,000, can you calculate the ROI?
Gross profit = Sale price - Purchase price = $350,000
Return on investment (ROI) = Gross profit / Capital outlay
= $350,000 / $20,000 x 100%
= 17.5 x 100% = 1,750% or 17.5 times
Assume if I had to spend extra $20,000 to maintain/update the property
Return on investment (ROI) = Gross profit / (Capital outlay + Maintenance)
= $350,000 / $40,000 x 100%
= 8.75 x 100% = 875% or 8.75 times
What I have not mentioned is that 12 years ago, I could borrow 105% from the bank, which means I borrowed every cent of the purchase price, plus stamp duty, all fees and charges. The rent received covered all the mortgage payment, which means a gross profit is between $300,000 and $350,000 in 12 years.
Property investment is for long term, and one should not sell it for a quick gain, unless in financial trouble.
I am not a qualified investment adviser; so do consult one should you include property investment in your investment portfolio.
Thank you for reading.
