the-abcs-of-real-estate-investing-ken LifeFeeling

Step 5: Calculate the Loan Payment and Your Profit Cash on Cash
Assuming you and the seller agree to the price of $256,000, now is time to figure out
what the loan payment might be. This is where your finance team member or broker could
step in, but I did it myself in a matter of seconds. I just went online and typed into my
Google search engine the words “mortgage payment”• and up popped numerous mortgage
calculators. I entered two numbers, the loan amount and the interest rate. Instantaneously
the mortgage payment schedule appeared! I love the twenty-first century.
Back to our real-world example. The numbers I used were based on our offer price and
10 percent or $25,600 down and the same interest rate of 7.5 percent. The mortgage
calculator churned out a loan payment of $20,010. Certainly a more palatable number when
you consider your projected net operating income, which is $22,368.
The very last step is to find out your actual profit by subtracting your loan payment from
your projected net operating income. Using the net operating income of $22,368 and
subtracting the loan payment of $20,010, the projected profit on this property is $2,358. Is
that good or bad? Well here’s how you know. You calculate your cash on cash, which you
recall, is a lot like return on investment.
To calculate cash on cash, divide your profit of $2,358 by the down payment of
$25,600. For this deal, your cash on cash return is 9.2 percent. Not a bad return.
Cash on Cash = Profit ÷ Down Payment
Congratulations! If you purchase this property for $256,000 with 10 percent down, your
return on investment will be 9.2 percent.
These five steps the Five Step Property Evaluation are the most important concepts in
this book. They give you the ability to evaluate property investments like the pros do. They
give you power and confidence. They give you realistic, fact-based benchmarks to make the
best property choices. They give you the basis from which to have reasonable conversations
with the seller. And they give you peace of mind that you are not getting into something that
may not pan out.
If you spend the time gathering the income and expense information clearly prescribed
in this chapter, you’ll know what it will take to run this property and how much money you
can expect to make from it. You’ll be well informed before you even talk to the seller again
and certainly before you ever make an offer. I buy all my rental properties this way using
these exact same five steps. I would never dream of doing it any other way. I like sleeping
at night too much.
CHAPTER SEVEN ACTION STEPS
• Get on mailing lists to secure several real property proformas to practice the Five Step
Property Evaluation process.
• Use the numbers on the pro forma to calculate your offer price.
• Realize that when you go through these steps for real, you will verify all the numbers
on the pro forma with your team members.
• Begin making calls to property owners to discuss buying property you are interested in.
• Perform this valuation process on an actual property with actual data.