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Future Knowledge 2020.1 "Rate of Return" English Version

“Copyright belongs to Future Real Estate Group. Sharing is welcomed without authorization, but please indicate the source". Thank you so much for paying attention to Future Real Estate Group. – Edmund Yang


Future Real Estate Group Lecture Hall 2020.1


There are different terminologies in all different professionals. The real estate market has no exception. In the past ten years as a real estate agent, from trading services, to investment, development, asset allocation management, etc., I have found that many customers lack understanding of real estate investment. This is why Future Knowledge will provide real estate related information with expertise on the website from time to time. Provide readers, investors, and owners with more professional information and reduce doubts about investment in real estate.


The most commonly heard investment real estate is the rate of return. What exactly is the rate of return? This article will briefly explain the commonly used terms in the market, you must understand the calculated Rate of Return.


One is CAP Rate: Capitalization Rate, one is ROI: Return on Investment, and one is Cash on Cash Return Their calculation method is as follows:


1), Return on assets (CAP Rate) = annual rental net income (NOI: Net Operating Income) / asset price, (net income = rental income minus real estate taxes, insurance costs, maintenance costs, management fees, etc. costs.

for example:

A single-family home in Vancouver costs $ 1,000,000, rents $ 3500 a month, and $ 42,000 a year. The land tax is $ 4,500 per year, insurance is $ 1,500, and management costs are $ 3,800.

CAP Rate = $ 42,000-$ 4,500-$ 1,500-$ 3,800 / $ 1,000,000 = 3.22%


2), Return on investment (ROI) = annual net rental income + annual loan repayment "principal" portion / funds invested

** Investment funds include: down payment for property purchase, land transfer tax, sales tax (new house), attorney's fees and other related miscellaneous fees. Is to buy the entire cost of this property.

The difference between ROI and CAP Rate is that in the above CAP Rate calculation method, the denominator subtracts the bank loan, and the numerator subtracts the mortgage, which is the bank interest that needs to be returned. The numerator also contains the principal in Mortgage. section.

Following the previous example, the house purchase price is $ 1,000,000, the monthly rent is $ 3500, and the year is $ 42,000. Land tax is $ 4,500 per year, insurance is $ 1,500, management costs are $ 3,800, down payment is 300,000, loan is 700,000, 3% interest, monthly repayment is $ 3,305-$ 39,660 per year, of which annual principal is $ 22,210 and annual interest is $ 17,450.

CAP Rate = $ 42,000-$ 4,500-$ 1,500-$ 3,800 / $ 1,000,000 = 3.22%

ROI Rate = ($ 42,000-$ 4,500-$ 1,500-$ 3,800-$ 39,660 + $ 22,210) / $ 300,000 = 4.92%

If there is no loan, the figures are the same.


3), Cash on Cash Return

This rate of return only calculates the funds you actually invested and the actual cash income you get each year. That is to say, in the calculation method of the above Cap Rate, the denominator subtracts the bank loan, and the numerator subtracts the principal and interest of the bank that needs to be returned. It is calculated as:


Cash on Cash Return = pre-tax cash flow / invested capital


The difference between this ROI and Cash on cash is that in the calculation method of ROI above, the numerator has the principal paid to the bank. The numerator of cash on cash is pure cash flow, which reduces the mortgage, which is the bank principal and interest that need to be returned.


Let's continue with the previous example. The house purchase price is $ 1,000,000, the monthly rent is $ 3500, and the year is $ 42,000. Land tax is $ 4,500 per year, insurance is $ 1,500, management costs are $ 3,800, down payment is 300,000, loan is 700,000, 3% interest, monthly repayment is $ 3,305-$ 39,660 per year, of which annual principal is $ 22,210 and annual interest is $ 17,450.


CAP Rate = ($ 42,000-$ 4,500-$ 1,500-$ 3,800) / $ 1,000,000 = 3.22%


ROI Rate = ($ 42,000-$ 4,500-$ 1,500-$ 3,800-$ 39,660 + $ 22,210) / $ 300,000 = 4.92%


Cash on Cash Return = ($ 42,000-$ 4,500-$ 1,500-$ 3,800-$ 39,660) / $ 300,000 = -2.49% (negative)


From the calculation method of Cash on Cash Return, we can understand the magic of investing in real estate in Vancouver from 2015 to 2016: each investment uses the principle of leverage, as much as the loan can be loaned, because the first payment is less. The bigger the return. In other words, the faster the return.


However, the bank must decide on your down payment according to your credit. On the other hand, it is true that Canadian credit is purchasing power. In the above analysis, we also saw that the bank interest rate also determines Cash On Cash. Return is a major factor. In low interest rates, investing in rental properties is a good choice.


But in 2020, bank interest rates were higher than in 2015, bank loans were not approved, and the down payment ratio was required. Coupled with various government policies, foreign buyer tax, empty house tax, and speculative tax, they deliberately suppressed house prices. This is why in our example, the cash return on cash is negative. Forcing many investors to sell their homes at reduced prices and reduce losses. And the government's purpose also achieved the goal, rapid cooling and expansion of Vancouver real estate that was too fast.


Three principles that the average investor has to pay attention to:


First, there must be Positive Cash Flow: If the net income (NOI: Net operating income) cannot afford the interest expense, a negative cash flow (Negative Cash Flow) is generated. Generally speaking, this kind of property investment risk is relatively high. To rely on property appreciation to achieve profits. This situation is mainly seen in off-plan housing or land investment.


Second, Cash on Cash Return is not less than 8%.


Third, the return on assets should not be lower than 3 ~ 5%


In the current Vancouver real estate market, a 3% Cap Rate for investing in residential properties is considered good. Each investor has a different personality and a different preference for the products they invest in. The return on investment and the return period of investment have different requirements in different regions and different situations.


Before investing in any property, you should have a certain understanding of the market's rent and prices, current affairs and government policies, etc., and complete a risk assessment before making a decision. There is no such thing as zero risk in investing in any real estate! Finding a team that is professional, trustworthy, capable of collecting information and correctly interpreting information can minimize the risk.


We hope this sharing of Future Knowledge will help readers get a better start in the new year!


“Copyright belongs to Future Real Estate Group. Sharing is welcomed without authorization, but please indicate the source". Thank you so much for paying attention to Future Real Estate Group. – Edmund Yang

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