Shortcut formula: (Cash in - Cash out) / Down Payment = Cash-on-cash Return.
Explanation: (Cash the property is expected to bring in annually minus annual expenses such as mortgage payment, repairs, insurance, etc.) divided bt the total amount invested. (I.e. Down payment plus closing costs) equals the cash-on-cash return.
Example: For a $250,000 investment, you put down $25,000. You estimate that after you pay the mortgage, taxes, insurance, the lawn guy, the plumber, and the water bill, you'll clear
$2,000 annually.
Formula: The Purchase price should be no more than 65 percent of the after -repair value of the property.
Alternate calculation method: 75 percent of your after-repair value- repair expenses =
purchase price
Example: You see an older home on the market that is visibly run down and in a state of disrepair. Asking price is $160,000 "as is". After you asses the damage, you estimate it will require $25,000 in new materials to get it in good shape. Homes of the same size of the neighborhood have been selling for $220,000 in "move-in, turn-key condition." You would need to buy a home for $140,000 to make it a worthwhile investment. (75 percent of $220,000 =$165,000. $165,000 minus $25,000 = $140,000.)