Understanding the basics

Understand The Basic ( Basic Insting)

Appraising the profitability of any potential property correctly is essential. You need to be able to work out if the property you wish to buy is going to leave you with a profit at the end. Over the next few pages I will explain some of the methods used to assess profit or loss on each property.

Gross Rental Yield
The following formula is used to calculate the Gross Rental Yield of a property.

Gross Rental Yield % =     Annual Rent X 100
                                                           Property Value

The Gross Rental Yield is calculated by dividing the annual rent by the property value and is realised by a percentage.

For example
A property worth £90,000 which generates an annual rent of £4,500 will have a gross rental yield of 5%

5 % = £ 4,5 0 0 X 100
                 £90,000

The Gross Rental Yield is a good way of comparing similar properties to evaluate the most profitable option. As you can see from the example below, property A is more profitable than property B.

Property A

7.6% = £ 6,5 0 0 X 100
                £85,000

Property B
Understanding the basics

3.7% =     £ 3,5 0 0 X 100
                  £95,000

Net Rental Yield
The gross rental yield is a good way to make comparisons, however it does not allow for any running costs.
The Net Rental Yield of a property can be a better measure of a properties profitability as it takes into account the running costs.
The following formula is used to calculate the Net Rental Yield.

Net Rental Yield % = A nnual Rent – Runni n g Cost    X  100

                                       Property Value

The example below shows 2 properties with an identical Gross Rental Yield however, when you take into account the running costs, it becomes apparent that property A is more profitable than property B.
Property A

6.9% = £ 6 ,50 0 – £ 6 00 X 100
              £85,000
Property B

6.3% = £ 6, 50 0 – £ 1 , 1 00 X 100
             £85,000

At this point we have not included the cost of borrowing from a mortgage or any applicable tax, as this is individual to each person.

Gearing
Gearing is a concept used in cases where the buyer uses his or her money to purchase property with agreater value then he or she has at their disposal.
The following illustration is a basic example showing why gearing is so effective in property investment.
Investment via a bank account for a period of 12 months with 5% interest rate.

 £12,000 X 5% = £12,600
£600 Gross Profit

Investment via property for a period of 12 months
Capital growth of 5% of £120,000 (NOT £12,000)


£12,000 = 10% Deposit for £120,000 house
£120,000 X 5% = £126,000
£6,000 Gross Profit

The following example outlines the reasoning behind investing monies across several properties as
opposed to a single property investment.
Investing £100,000 cash in one property for a period of 12 months .
The net yield of 4% achieved by renting x £100,000 = £4,000
Profit = £4,000
Capital growth of 5% of £100,000 = £5,000

A return of £9,000 on your investment

Investing £100,000 across multiple properties for a period of 12 months
£15,000 deposit across 6 properties with a value of £100,000 each
The yield of 4% achieved by renting X £600,000 (6X£100,000) = £24,000
Profit = £24,000
Capital growth of 5% of £600,000 = £30,000

A return of £54,000 on your investment

Return On Investment (ROI) or Cash-on-Cash Return

ROI reveals the profit you have made over a 12 month period as a percentage of the money you
have invested in your property.
This is the formula used to calculate the Return On Investment.

ROI % = C a s h F lo w X 100
                Cash Invested

ROI is the percentage of return, cash flow is the gross annual rent minus costs such as void
periods, maintenance costs and mortgage repayments. The cash you have invested is the deposit and
legal costs paid together with any other fees you may have paid in the purchase.

Loan-To-Value Formula (LTV)
The Loan-To-Value (LTV) is used to work out the ratio between your loan balance and the market
value of the property resulting in a percentage.
This formula is used to calculate the Loan-To-Value.

LTV % = B a la n c e o f L o a n X 100
Market Value

For example a property with a market value of £100,000 with a remaining loan balance of £85,000

LTV % = £ 8 5 , 0 0 0 X 100

               £ 100,000

Equity Formula
This is a formula to work out the equity on your property.
Equity £ = Market Value - Balance of Loan
For example a property with a market value of £100,000 with an outstanding loan balance of
£85,000 has £15,000 worth of equity.

Rental Cover Formula
Mortgage lenders often need to work out the rental cover of a mortgage to gauge the safety margin
for their own risk, the rental from a property will be required to exceed the mortgage payments by
approximately 130%. The formula being :-
Rental Cover £ = Monthly Mortgage Payment X 130%
For example: A mortgage application needs to be approved by the lender. With a monthly
mortgage repayment of £200, must realise at least £260 rent per month which equals 130% of £200.
The rental cover can vary from lender to lender.

 

Gazumping
When the property market starts to improve and the price of properties rise then so does the
unfortunate events surrounding gazumping. The most common practice is evident when the vendor
agrees to accept your offer on a property but continues to market the property and then accepts a higher
offer, at this point you can consider yourself ‘gazumped’. Regrettably this practice is not illegal, current
legislation does not protect the buyer when too many buyers are chasing too few properties and lenders
effectively auction the mortgage on the property to the highest bidder.

Gazundering
When the property market has stalled or is in the process of recession immediately prior to
exchanging contracts – the buyer suddenly offers a lower price than his or her original offer, knowing
the seller is then put in the ambiguous position of not wanting to lose the sale.

 

Gold And Real Estate

Gold or Property - Property Management

People invest in real estate for a variety of reasons. There are those who believe that real property is more stable than gold as an investment, in terms of price and security. They contend that as real property such as land is immovable, it cannot be stolen. Even if infrastructure and improvements on it such as a house depreciate over time, the land itself does not, but consistently appreciates, under normal conditions.

Gold-oriented investors, on the other hand, defend their precious metal to be more stable as its value consistently appreciates and accepted worldwide. Further, they are used as paper currency benchmarks and security for borrowing, secured as gold reserves in coins and/or bullions. That makes gold more acceptable as legal tender than land.

The debate could go on and on without resolution as either or both are good as investment, tipping the balance only slightly in favour of one or the other depending on the particular economic situation of an area or country. Banks, finance, the jewellery and the real estate industries are the institutions that are involved in trading and in similar transactions involving gold and land. But whether dealing in gold or land, a lot of speculation is involved in their investment and trading.

Centres of trading are where gold and land part ways.

Land, along with improvements and structures thereon, has a more local colour and is influenced by local business and industry dynamics, particularly under the real estate domain. It also greatly influences local economics in the same manner that international economics influence local business and economics. Investment patterns and preferences are dynamics that make land meet gold again in the local setting.

Gold as reserves, on the other hand, is secured in national central banks as a country's security for borrowing and foundation for its paper currency. As a precious metal, it is traded in commodity markets influencing local prices, used as a standard for trading and as benchmark by jewellers in pricing their products marked up for profits that varies from one to another depending on established name and prominence as a jewellery brand based on artistic aesthetics and craftsmanship.

The pieces of jewellery may be pawned at any time, often to jewellery shops themselves, at a certain percentage of its market value for cash, charging interest rates that accrue monthly. Failure to redeem pawned items within a period prescribed by law, forfeits claim on the items after due process of information and reminders between pawner and pawnshop.

Real estate property can be used as security for mortgage loan which is, for all intents and purposes, similar to pawning jewellery except that the former is through a bank under laws, policies and regulations applicable to real estate transactions.

Commercial Property Management Services

When working in commercial management you have a lot of responsibilities. It is much more complicated than managing residential properties because it involves the government more heavily. There are more laws to follow, more permits, more leases and so on.

Leasing to the government can be tough. You will have to watch tax escalations. After the first year they are paid in full. Only if claims are submitted within 60 days of the payment date you will get the escalation.

If the GSA is looking to alter lease spaces, you will have to sign a waiver of restoration which will say that the GSA does not have to return it to the spaces to the way they were. If you do not sign, then that means they can still change the space, but will have to return it to the way it was. It is important to keep records in case the lease runs for 20 or so years. A lot can change in that time.

There is a clause called The Contract Disputes Act. It defines the process of what happens if you and the government can't come to an agreement. The government may have a one-up on you but you can still appeal. The GSA will allow for you to do that to their Board of Contract Appeals.

You are going to want to provide maintenance. This means you will need to hire janitors and provide the building with up-keep. Whether this up-keep be repairs on the cracked floor, the roofing, the chips in the front desk or anything else, it is important to make sure the place is looking its best. Hiring janitors on the other hand are just as important. Hiring a good one is more important. If you can find someone that can get the place spic-and-span you have found the right person. A commercial place is a professional setting which will need to maintain a professional look. Floors and crevices should be washed, windows should be clean, dust should be removed and everything should be in order.

Of course you are going to need to provide safety and security. Unoccupied buildings are often vandalized buildings. Having a security system will help to keep people from defacing the property. Not only will you need to have a patrol to make sure the outside is safe, but you will need door security with a check in. This will prevent unsafe people from getting in to the building.

A commercial place is a tough task that needs to be kept in perfect order. When the government is involved you need to take extra care of your place.