This article is part of the series: Revealed: 4 secret ways to quadruple your real estate investment return today.
With any and all investments the internal rate of return that the investment generates is what should be looked at. Any other type of return is just noise as it’s not giving you the actual percentage growth you are receiving on your money. You see, IRR takes into account every single variable that affects what you get out as a percentage of what you have put in. This is the only true measure of performance. Anything else is leaving out variables and giving you a skewed result.
This is the first step to increasing your return, namely knowing how to measure it correctly and then analysing property accurately.
Let me give you a hypothetical example of a real estate investment:
Market value: R1,350,000
Purchase price: R1,200,000
Bond registration cost: R24,380
Bank initiation fee: R6,038
Post, petties, fica: R1,485
Property transfer costs: R 24,380
Transfer duty: R6000
Interest rate: 9%
Term: 20 years
Capital growth rate: 8.8% (ten year moving average sea point west)
Body corporate levies: R1130 PM
Maintenance: R650 PM
Rates and taxes: R430 PM
Water and electricity: R800 PM
Letting fee: R980 PM
Rental income: R15,000 PM increase at 8% per annum
As you can see there are lots of variables to consider. You will need an analysis software to input these variables so you can get accurate results, it takes a mathematician and time to analyse one of these real estate investments if you’re doing it on your own so software is a no brainer. Let’s look at the table below, as you can see these results give you a lot of insight into how the property is performing in a number of areas. None being more important than the IRR on the bottom line. This is the most comprehensive measurement of how your money is performing in an investment vehicle, in this case residential real estate.
Now compare this to a gross yield which most people use to assess their potential real estate investment which is yearly rental R180,000/ purchase price R1,200,000 = 15% yield. It really is pointless and misleading assessing your property in this manner. This is because if any of the other variables are far greater or less than expected your final result is skewed.