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    Computing Real Estate Returns

    When you work out your real estate budget, there are five main elements you should consider for correct calculations. Here is a brief summary of the terms you need to know.

    - Positive Equity Discount. Equity discount is the difference between what you paid for a property and what you sell it for. Pay say, $80,000 and sell for $100,000 and your equity discount is $20,000. This is the largest single element in your calculations.
    - Negative Equity Discount. Is if you have bought above market value. Subtract the market value from the buying price. You would buy above market value if the cash flow was great enough to make it worthwhile, or perhaps if the deal was offered with no down payment for a little higher cost.
    - Cash Flow. This is simply your net operating income less your mortgage repayments. Net operating income is your gross income less your expenses. Cash flow is what you have left after paying your expenses and mortgage payments. It is seen as one of the most important parameters in real estate returns.
    - Principal Payoff. Most of your mortgage repayments consist of interest, especially at first. What is not interest is principal payoff. (Principal is the amount you borrowed).
    - Tax Saving. This is the amount of money you save by having property. Multiply the depreciation by your tax rate level to find this.
    - Appreciation. This is calculated by looking at the growth rate of nearby real estate. If it rises by say 5% and your property is worth $500,000, then the appreciation is worth $25,000.

    Calculate these five elements, add them together and divide by your down payment. As an example, if you bought at $100,000 and it is now worth $120,000, your equity discount is worth $20,000. If your cash flow this year is $2,000, while the principal payout is $200 and tax saving is $500, at the end of the year, your appreciation would be $5,000, which is 5% on $100,000.

    To calculate your breakeven point on a rental property: -

    - Estimate your gross rent.
    - Subtract your estimated vacancy (if any).
    - Add other income.
    - This will give your effective gross income.
    - Subtract your operating expenses.
    - Now you have your Net operating income (NOI).
    - Subtract your debt service.
    - Gives cash flow before taxes.
    - Add mortgage principal repaid to BTCF
    - Subtract depreciation.
    - You have your taxable income.
    - Subtract taxes due or add taxes saved.
    - This is your after tax cash flow.

    This can be used to determine the financial feasibility of your potential investment.

    There are many online helps for calculating various things like this. They can be found through places like www.mortgage-investments.com. Some of these websites have free forms that you can download or use online. Just fill them in to help with your financial calculations. You can also buy software for the same purpose. Simply Google, "Resale value of real estate".

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