A long time friend texted me the other day, “What’s the best real estate calculator to use?”
I texted them back, “I don’t know. I’ve never used one.” I’ve always used a cheap, plastic, Dollar Store, solar powered calculated.
I operate on a “Cash on Cash Return” basis; simple multiplication and division. When the annual NET income divided by the investment = 25% ROI or more…I start looking hard. When the ROI gets over 30% I start buying…whatever it is that’s generating the income.
For me, the trick has always been finding the true NET INCOME…if we can get that number right, it doesn’t matter what calculator we use.
Monthly Income X 12 = Annual Income.
Annual Income divided by the out of pocket Investment amount = Annual Return On Investment (ROI)
A Seller offers to sell you a property
$60, 000 Acquisition Price
$10, 000 Down Pmt
$50, 000 @10% for 180 months
$ 537.30 Principle + Interest
$ 103.70 Taxes
$ 60.00 Insurance
$ 700.00 TOTAL PITI
You estimate you can sell the home with owner financing “as-is” for a profit:
$90, 000 Sale Price
$ 5, 000 Down Pmt
$85, 000 @ 10.5% for 305 months
$ 800 Principle + Interest
$ 103.70 Taxes
$ 72.30 Insurance
$ 25.00 Servicing Fee
(You service your own
loan…it’s your $25)
$ 1, 000 TOTAL PITIS
If everything goes according to the plan, your total outgoing payment will be $700.
Your total incoming payment is $1, 000
Your positive cash flow is $300/mo.
So what is your “Cash on Cash” Return on Investment (ROI)?
First of all, what is you out of pocket expense? You put $10, 000 down when you bought, BUT, you collect $5, 000 down from your buyer when you sold.
You’re out of pocket $5, 000
($10, 000 – $5, 000 = $5, 000)
Next, calculate your “Annual Net Income.” Your payment to the Seller is $700. Your income from your Buyer is $1, 000. You positive monthly income = $300/mo. You annual net income is $3, 600
($300 X 12 = $3, 600)
The question is, “What is the Cash on Cash ROI?”
Annual income divided by investment = ROI
$3, 600 divided by $5, 000 = 0.72
You hardly need a calculator to decide to take this deal or not; you put out $5, 000. You get back $3, 600 in the first year. By the middle of year 2 you got all your $5, 000 investment back…the rest is profit; $300/mo Profit for the 162 remaining months AFTER you get your investment back. And after that 162 months your loan to your Seller is paid off. So you get to collect the entire Principle/Interest+Service Fee = $825/mo for another 120 with no outgoing payment.
$300 X 162 months = $48, 600
$825 X 120 months = $99, 000 TOTAL NET INCOME= $147, 600
(After you got your $5k investment back)
…BE THE BANK!
The bigger question in this example would be; Is the loan from the seller to me a “Collateral Only, Non-Recourse” loan?” …or am I signing a “Personal Guarantee?”
I’m not signing a personal guarantee for $50k for just $300/mo cash flow.