Wholesale Business Breaking Down the Language Barrier:
AR = 8% (40%/5) When to use it: To get a “whole picture” of a future investment or a completed investment. What you need to know: • Use ROI to calculate annu- alized returns by dividing ROI by the number of years you have owned the property. NO. 10 INTERNAL RATE OF RETURN (IRR) IRR is defined as “the discount rate that makes an investment’s net present value equal to zero.” IRR accounts for when you spend and receive cash. For most investors, it is better to re- ceive cash sooner rather than later because then you can reinvest it. You will need an IRR calculator (my favorite is the IRR function available in Excel) to derive it. When to use it: To put your ROI in perspective with your initial outlay of money or com- pare investment opportunities • IRR may also be referred to as “economic rate of return” or “discounted cash flow rate of return” • IRR omits external factors like cost of capital and inflation • In most cases, the higher a project’s internal rate of re- turn, the more desirable it is • in different asset classes. What you need to know:
mine the strike price most optimal for solid profits on a potential investment. What you need to know: • Usually used for flips • The best ARV values are derived using comparable costs from comparable properties • Finalize your strike price after a detailed analysis that includes carrying costs NO. 8 THE 70% RULE (Net Operating Income – Annual Debt Service) / Cash in Property Example: NOI = $120,000 Annual Debt Service = $100,000 Cash in Property = $100,000 Cash on Cash Return = 20% ($120,000 - $100,000) / $100,000 When to use it: To evaluate the success of an investment after its first year. What you need to know: • This only provides a return value for one year NO. 9 RETURN ON INVESTMENT (ROI) (Gain on Investment – Cost of Investment) / Cost of Investment Example: Gain on Investment = $20,000 Cost of Investment = $50,000. Years owned = 5 ROI = 40% ($20,000 / $50,000) Annualized Return (AR): ROI/# years you owned the property
> Continued from :: PG 35 10 Real Estate Calculations Every Real Estate Investor Should Know What you need to know: • Usually used with apartments • Can be applied using real numbers or approximations • May be inserted into cap rate and DSCR estimates NO. 7 THE 70% RULE Strike Price = (0.7 X After Repair Value) – Rehab Example: After Repair Value
You will hear wholesalers talk about their “list” fre- quently. Usually, they mean a list of emails and phone numbers to which they dis- tribute their deals. Pro Tip: Be respectful of your list as you build and maintain it. Only send good deals with solid due diligence behind them. It only takes a few “rotten apples” for your list to start sending you straight to spam and sending your profits down the drain. NO. 8 An Effective, Efficient Closing Once a buyer makes an acceptable offer, send the con- tracts to your title company to close. The company should handle nearly every aspect of the closing, although you will need to be on hand to sign any documents (some will allow you to do this virtually) and collect your assignment fee, which may range from a few thousand dollars to Assignment fees are that “cushion” we talked about earlier. As the person who initially located and vetted the deal, you deserve pay- ment for your services! That payment comes in the form of an assignment fee when you assign the contract to another investor so they can complete the purchase of the property for the price you established with the buyer. • multiple thousands. Breaking Down the Language Barrier:
(ARV) = $200,000 Rehab = $30,000
Strike Price = $110,000 (0.7 x 200,000 = $140,000. $140,000 - $30,000 = $110,000.) When to use it: To deter-
STRIKE PRICE: The highest price you can pay for an investment property and still have a high likelihood of generating a solid return. CARRYING COSTS: The cost of owning a property, usually used in context with a flip. Carrying costs include taxes, maintenance, and insurance.
> Continued from :: PG 43 8 Important Factors in a Successful
96 | think realty magazine :: september 2018
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