Working with business owners I am surprised at the number who have thought about or dabbled in property investment, with varying degrees of success.
The common thread seems to be in the lack of pulling together the vital figures which will enable you to see if this great deal really is…a great deal!
It’s actually not a lot different from any other types of business;
- making sure the figures stack,
- and measuring the figures.
This should ensure the right corrective actions are taking place to ensure that the deal performs and a great rate of return is achieved.
I have put together my own proforma for calculating the critical levels of figures you must do, before you even put in an offer. They don’t take long to pull together so don’t worry they won’t slow you down and having done the figures properly this means you have a great numerical blueprint to work to.
The key layers of figures then are as follows:
1) Calculate how much of a discount you are achieving on the purchase price (If any). Always try to achieve a discount on the purchase price, the only sure way is to pay in cash. However, if this is not possible be aware of how much you will need to put into the deal. This will either be just the deposit as you get a mortgage for the remainder, or the full amount of cash. As I said, buying in cash should secure you a discount. Any discount you can achieve will materialise when you remortgage the property upto the full market value and hence you can then take more money out of the investment for reinvestment elsewhere.
2)Calculate how much it will cost you in cash to take the deal to completion including any post completion work like renovating and refurbishment required to bring the property fully up to spec for either selling on or renting out.
This will then inform you of how much cash you require to complete the deal and get some cash back either in rental income or sales proceeds.
Be careful here and make sure you put realistic estimates in with suitable levels of contingency, the worst thing is to run out of money on a half renovated building.
3) Calculate how much realistically you can expect to make in terms of net profit if the property Is rented out. This will enable you to see how much annual profit you will make on the property.
4) Calculate the final amount that will be left in the property once all works are completed and on achieving a valuation of the property to full market value. This will inform you of how much of your cash remains in this deal.
Using the figures from step 3) and step 4) you can see what your Return on investment will be and can evaluate if this is sufficient for your needs or more importantly could you get a better return elsewhere.
To download the Template click below
If you enjoyed this post, why not subscribe for all future posts and updates.