In the spotlight - Wasim Ahmed

[Vanessa]

Nick and I are currently in the process of introducing some new initiatives to make Property Tribes the most valuable property resource on the web.

One of these includes "In the Spotlight", where we interview key/active members of the community so that you can get to know them better.

The purpose of this is to raise awareness of what tribal members do, so that you know who to go to if you need a particular product, service, or some advice. We hope that one of the benefits of membership of the tribe is increased business transactions between the members.

So Wasim, please can you answer the following questions for us:

1. When did you first get involved in property and what attracted you to it initially?

2. What is your own personal strategy with regards to investing?

3. What is your main area of expertise and skill set?

4. How do you see the future of property investment?

5. What is the worse mistake you ever made in your property investment career?

6. What is the best bit of advice you could give to a novice investor?

7. How can you support or assist other members of the tribe?

8. Tell us one unusual non-property related thing about you ....

9. If you could advocate one other person or company in property, who would it be?

10. Anything else you would like to say?

If any tribal member has a question for Wasim, please add it to this thread .....

If you would like to be featured "In the Spotlight", please drop me an email, but please note that this feature is for active contributers to the forum, not passive viewers ...

[Wasim]

Hi Guys

I am happy to be "In The Spotlight" and hope that it gives fellow investors a valuable insite into who I am and what my motivations are.

1. When did you first get involved in property and what attracted you to it initially?

I got into property back in 2004. It was not something i was looking to get into if i am honest. My mortgage on my home was paid off, some of my business ventures had paid off and i was "Semi-Retired" for the want of a better word. However, being someone who has always setup and run businesses i soon got bored of sitting around doing nothing. It was at this point that a very good friend of mine who had a sizeable property portfolio approached me to manage his property portfolio.

Once the systems were in place to manage his portfolio, i took on another 3 portfolios and at one point was single handedly managing about 120 properties up and down the uk. I soon learnt how these guys were buying and building their portfolios and i said to myself that i wanted a piece of this. At the time when i started Bridging Finance was available but only the very serious investors were using it...and it was really only available through the likes of Savills and Tiuta. At the time both required business plans or at the very least an "Investor Profile"...abit like a CV but geared towards instilling confidence.

2. What is your own personal strategy with regards to investing?

Originally i started buying properties that looked good on paper and the sums worked. Soon i realised that Property Investment was no different to any other type of business and should be run as such. The product that I was offering HAD to match the customers requirement. There was no point buying blocks of flats in an area that usually attracts young families. However, i only started thinking like this during a void period....3 properties vacant at the same time for 3 months cost me around £4-5000...OUCH!!

A viable strategy is probably the most important part of Property Investment. A simple analogy to bring this home is what would you do with a ball on a football pitch if there are no Goals for you to aim at?!

Having carried out extensive research in my area I have determined that 3bedroom Terraced Houses will rent at £450PCM all day long and will cost around £75-80,000. The rents stacks on these figures and i usually have tenants waiting to move in as soon as i complete on a purchase.

3. What is your main area of expertise and skill set?

My main areas of expertise lies in Investment Strategies and Financing (I am a Mortgage Broker)...But more importantly Due Diligence to the nth Degree...Im the type of person i get a good deal, i always ask myself why did the other party agree to my proposal...lol.

4. How do you see the future of property investment?

My view is that it is always a good time to buy property. Now is better but 6 months ago it was even better. However, going forward, property will always outperform the typical equity based investments. The only thing that will hinder growth in property investment over the next few years is the lack of finance, or should i say the Banks Lack Of Apetite To Lend to the property investor.

Today, a 75%BTL mortgage will have an app fee of around 2-2.5%, a redemption penalty of around 3% and a fixed rate of around 5-7%...thats atleast 4.5% above base rate...well above the commercial mortgage rates of about 2 years ago. Not really the products we want.

5. What is the worse mistake you ever made in your property investment career?

My investor friends and i lost around £20k on reservation fees . We were looking to take 20 apartments from a large developer (Suburban Splash - Nudge Nudge) in Manchester city centre. They showed us spreadsheets of these properties selling at £190k but if we bought all 20 they would sell them to us at £140k. Great we thought and duly handed over a cheque for £20,000 as reservation fees. When we submitted our mortgages apps, the valuations came back at £105k-£120k. Needless to say when we presented this info to the developer they stuck to their spreadsheets. We lost the fees as it was better to pull out than to try and get these to stack.

What did i learn from this...its better to spend £200 on a private valuation report before you start negotiations and then use that as the basis of your negotiations not some inflated price that someone thinks their property is worth. If the vendor doesnt want to use it as a starting point just walk away. Its a buyers market.

6. What is the best bit of advice you could give to a novice investor?

Its a case of "Buyer Beware"...so always do your due diligence..visit the property, daytime and evening...see what goes on around the area, check out the quality of schools, transport links, amenities, why is the vendor selling, whats their position, arm yourself with data from the "land registry" based websites...ie rightmove, upmystreet etc. If you are looking to buy flats, how many flats are there in the development? how many of these are owned by investors? The more investors the more chance you will be fighting over tenants.

Also just as important, monitor and maintain your credit file and credit score...always make sure it is a true reflection of your credit profile.

7. How can you support or assist other members of the tribe?

My door is always open...if you have a question just ask...pm or email me. From Stacking Deals to Sorting the finance.
Infact i am assisting in stacking deals before we submit mortgage applications...this way ensuring that the application has a better chance of going through.

8. Tell us one unusual non-property related thing about you ....

My brother and i run a successful recruitment agency placing Quants in financial institutions. Very niche and VERY lucrative. We charge 20% of the annual salary as our fees for head hunting a suitable quant.

9. If you could advocate one other person or company in property, who would it be?

Abit difficult to say really, i have a lot of respect for:

Nick Tadd
Vanessa Warwick
Faisal Khan
Tanvir Choudhry (Not related to Asif Choudhry below)
Asif Choudhry (Owns alot of the Cost Cutters around London and now dabbles in Property Development)
All the members of the Tribe forum.


10. Anything else you would like to say?

Due diligence (your homework) is really important in all aspects of business. From education to Investment. Before you spend money on any Guru always ask the question on the forum and you will get an honest opinion. There are alot of people peddling information that was valid 18months ago but not today. Remember what these courses do not teach you is negotiation...this is the hardest part...and is a skill that you can learn, to some its something they can do from the day they are born...and for others like me, it is a skill that i had to learn. Im still learning, but im getting better at it.

Last but not least, keep your emotions in check. remember, just because you wouldnt live there doesnt mean no one wouldnt. If the property fits your strategy and the maths works then buy it!!!

I think i have covered everything...but if you still have questions or need something clarifying just ask!!!

Best regards

Wasim

[Andrew Barnes]

Useful advice from the 'hot seat' Wasim! All good stuff...

Wasim said:

Hi Guys

I am happy to be "In The Spotlight" and hope that it gives fellow investors a valuable insite into who I am and what my motivations are.

1. When did you first get involved in property and what attracted you to it initially?

I got into property back in 2004. It was not something i was looking to get into if i am honest. My mortgage on my home was paid off, some of my business ventures had paid off and i was "Semi-Retired" for the want of a better word. However, being someone who has always setup and run businesses i soon got bored of sitting around doing nothing. It was at this point that a very good friend of mine who had a sizeable property portfolio approached me to manage his property portfolio.

Once the systems were in place to manage his portfolio, i took on another 3 portfolios and at one point was single handedly managing about 120 properties up and down the uk. I soon learnt how these guys were buying and building their portfolios and i said to myself that i wanted a piece of this. At the time when i started Bridging Finance was available but only the very serious investors were using it...and it was really only available through the likes of Savills and Tiuta. At the time both required business plans or at the very least an "Investor Profile"...abit like a CV but geared towards instilling confidence.

2. What is your own personal strategy with regards to investing?

Originally i started buying properties that looked good on paper and the sums worked. Soon i realised that Property Investment was no different to any other type of business and should be run as such. The product that I was offering HAD to match the customers requirement. There was no point buying blocks of flats in an area that usually attracts young families. However, i only started thinking like this during a void period....3 properties vacant at the same time for 3 months cost me around £4-5000...OUCH!!

A viable strategy is probably the most important part of Property Investment. A simple analogy to bring this home is what would you do with a ball on a football pitch if there are no Goals for you to aim at?!

Having carried out extensive research in my area I have determined that 3bedroom Terraced Houses will rent at £450PCM all day long and will cost around £75-80,000. The rents stacks on these figures and i usually have tenants waiting to move in as soon as i complete on a purchase.

3. What is your main area of expertise and skill set?

My main areas of expertise lies in Investment Strategies and Financing (I am a Mortgage Broker)...But more importantly Due Diligence to the nth Degree...Im the type of person i get a good deal, i always ask myself why did the other party agree to my proposal...lol.

4. How do you see the future of property investment?

My view is that it is always a good time to buy property. Now is better but 6 months ago it was even better. However, going forward, property will always outperform the typical equity based investments. The only thing that will hinder growth in property investment over the next few years is the lack of finance, or should i say the Banks Lack Of Apetite To Lend to the property investor.

Today, a 75%BTL mortgage will have an app fee of around 2-2.5%, a redemption penalty of around 3% and a fixed rate of around 5-7%...thats atleast 4.5% above base rate...well above the commercial mortgage rates of about 2 years ago. Not really the products we want.

5. What is the worse mistake you ever made in your property investment career?

My investor friends and i lost around £20k on reservation fees . We were looking to take 20 apartments from a large developer (Suburban Splash - Nudge Nudge) in Manchester city centre. They showed us spreadsheets of these properties selling at £190k but if we bought all 20 they would sell them to us at £140k. Great we thought and duly handed over a cheque for £20,000 as reservation fees. When we submitted our mortgages apps, the valuations came back at £105k-£120k. Needless to say when we presented this info to the developer they stuck to their spreadsheets. We lost the fees as it was better to pull out than to try and get these to stack.

What did i learn from this...its better to spend £200 on a private valuation report before you start negotiations and then use that as the basis of your negotiations not some inflated price that someone thinks their property is worth. If the vendor doesnt want to use it as a starting point just walk away. Its a buyers market.

6. What is the best bit of advice you could give to a novice investor?

Its a case of "Buyer Beware"...so always do your due diligence..visit the property, daytime and evening...see what goes on around the area, check out the quality of schools, transport links, amenities, why is the vendor selling, whats their position, arm yourself with data from the "land registry" based websites...ie rightmove, upmystreet etc. If you are looking to buy flats, how many flats are there in the development? how many of these are owned by investors? The more investors the more chance you will be fighting over tenants.

Also just as important, monitor and maintain your credit file and credit score...always make sure it is a true reflection of your credit profile.

7. How can you support or assist other members of the tribe?

My door is always open...if you have a question just ask...pm or email me. From Stacking Deals to Sorting the finance.
Infact i am assisting in stacking deals before we submit mortgage applications...this way ensuring that the application has a better chance of going through.

8. Tell us one unusual non-property related thing about you ....

My brother and i run a successful recruitment agency placing Quants in financial institutions. Very niche and VERY lucrative. We charge 20% of the annual salary as our fees for head hunting a suitable quant.

9. If you could advocate one other person or company in property, who would it be?

Abit difficult to say really, i have a lot of respect for:

Nick Tadd
Vanessa Warwick
Faisal Khan
Tanvir Choudhry (Not related to Asif Choudhry below)
Asif Choudhry (Owns alot of the Cost Cutters around London and now dabbles in Property Development)
All the members of the Tribe forum.


10. Anything else you would like to say?

Due diligence (your homework) is really important in all aspects of business. From education to Investment. Before you spend money on any Guru always ask the question on the forum and you will get an honest opinion. There are alot of people peddling information that was valid 18months ago but not today. Remember what these courses do not teach you is negotiation...this is the hardest part...and is a skill that you can learn, to some its something they can do from the day they are born...and for others like me, it is a skill that i had to learn. Im still learning, but im getting better at it.

Last but not least, keep your emotions in check. remember, just because you wouldnt live there doesnt mean no one wouldnt. If the property fits your strategy and the maths works then buy it!!!

I think i have covered everything...but if you still have questions or need something clarifying just ask!!!

Best regards

Wasim

[REI]

Wasim,

A few things I want to comment on or ask about. See below.

Wasim said:

2. ...

Having carried out extensive research in my area I have determined that 3bedroom Terraced Houses will rent at £450PCM all day long and will cost around £75-80,000. The rents stacks on these figures and i usually have tenants waiting to move in as soon as i complete on a purchase.

I can easily compute the gross yield given the numbers you offered. That said I am not a believer in gross yield. Too many false positives.

Assuming you compute the net yield, Net Operating Income (NOI) or something similar what do you expect in terms of expenses for the target property? Assuming 3 bed terraced properties, any rough estimate for expenses?

Some investors have found that 35% to 40% of gross scheduled rents is about right. What do your numbers tell you?

Wasim said:

4. ...
My view is that it is always a good time to buy property. Now is better but 6 months ago it was even better. However, going forward, property will always outperform the typical equity based investments.

Wonderful comment.

Put another way, if the numbers stack up then they stack up. Assuming you are using assumptions that remain valid over time (not today's artificially low interest rates) then a deal is a deal when the numbers tell you have a deal.

Wasim said:

5. ...
What did i learn from this...its better to spend £200 on a private valuation report before you start negotiations ...

Let's assume £200 funds a valuation, what could an investor do to produce almost the same level of accuracy without hiring out the work?

Valuations are a combination of homework plus a guess. The paid professional looks at the relevant data and then offers their best guess. Many investors who look at a lot of deals in the same area will start to know the actual prices being paid or know where to look to find the data.

Wasim said:

10. ...
Last but not least, keep your emotions in check. remember, just because you wouldnt live there doesnt mean no one wouldnt. If the property fits your strategy and the maths works then buy it!!!

Another great statement.

Too many people let their personal biases drive their decisions. They either would not live in the same place, they believe that only houses, flats, country, coast properties are the future so they screen out everything else.

If the numbers stack up and you actually are using the right set of numbers then the property can support itself. Weigh up the extremes (extreme interest rate shifts, loss of the major employer in the area, etc) to stress test things. Otherwise let the numbers tell you want you should be buying.

John Corey
Follow me on Twitter -> www.twitter.com/john_corey
www.ChelseaPrivateEquity.com/blog

[Wasim]

Hi Guys

Thanks for your comments.

@John:

Re No2: I too do not use Gross calcualtions as these figures do not show the true picture as far as yields are concerned. I use net figures...using my last purchase as an example:

Purchase Price £76,000
LTV on mortgage 85%
Amount Borrowed £64,600
My Deposit £11,400
My Legal Fees to purchase prop £1000

Interest Paid on Loan:
£64,600 x 5.2% = £3359 Per Annum

Landlords Insurance = £324

Rent Received:
£450 x 12 = £5400

Profit on rent :
£5,400 - £3359 - £324 = £1717

Using the calculation:

Profit (Net Rent)
------------------------ x 100 = Net Yield
Capital (Own Money)

we get

(1717/12400) = 13.8% Net Yield

I use this calculation as it does not take the props value into consideration...which is good as i view property investment as a longterm strategy rather than short to medium term.

As far as rough estimates go, i tend to stay away from anything that needs more of a light refurb, as my strategy is to get tenants in from Day1. However for the basics i would use the following:

GCH £2000
Windows £1900
Bathroom £1000
Kitchen £1500
Decorating £1000
Replastering £1400 (£200 per room)
Garden Clearance £200
Re-wire £1200
Gas certs £40
EPC £40
Insurance £350

Re No5:

John Asked "Let's assume £200 funds a valuation, what could an investor do to produce almost the same level of accuracy without hiring out the work?"

As part of my own Due Diligence Process i do use the many websites that show historic sales data for properties up and down the UK. All these get their data from the Land registry. These websites have valuable data that makes a good starting point.

I say starting point as all these have one major flaw. They do not hold or show a property description. The land registry will not show how many bedrooms a property has nor do the other websites apart from Hometrack that is, but they work slightly differently.

There are various ways that you can try and determine a properties value... have a look at Rightmove and see what properties have been selling for in the past in a particular post code...SOLD COMPARABLES and also have a look at what they are on the market for in the same post code FOR SALE COMPARABLES. As you a property investor you have to network like mad and to this end its good to make friends with agents in the areas that you are looking to buy. They are a wealth of information but you do need to talk to a few to get the correct picture.

All this is ok, but i find that nothing is as powerful as a Valuation Report from a RICS Surveyor when it comes to negotiations. True its £200 but in my case this pales in significance to the £20k lost in fees. Once bitten twice shy. Surveyors also maintain their own databases of properties and they use these for valuations as well as the data available from the land registry. Ever wondered where the Comparables data comes from at the end of your Val report? Its from their own Database.

Best regards

Wasim

[REI]

Wasim,

Thanks for the detailed reply.

I have never seen someone calculate net yield the way you did. Maybe it is me. Is the definition of net yield clear so there is one way to compute it? Or is the equation you are using more of a home brew version?

Net Operating Income is very much standard in the US. When I use the terms with investors in the US we all would compute it the same way. The NOI is what a building can produce in income after all expenses EXCEPT debt service, depreciation and income taxes. In other words, what the building can produce independent of the investor's capital and tax positions.

Your net yield focuses on the cash on cash return from current income after debt service but not including any other running costs (assumes tenant pays everything or ignores some of the costs). The calculation seems similar to a return of capital calculation (how long to get the initial cash paid back from current cash flow).

I am not disagreeing with your use as much as trying to understand the logic / assumptions.

John Corey
Follow me on Twitter -> www.twitter.com/john_corey
www.ChelseaPrivateEquity.com/blog

[Wasim]

Hi John

I use Net Yield because its a true reflection of what is going on with the property...but i do not think its a standard calculation. It should be though as it gives you a yield based on Net Income for a property over what it has cost you to buy the property.

Any costs ie Maintenance would be deducted from the Net rent, as would service charges and agents fees if an agent was managing the property for me. This could be calculated as often as you like, weekly, monthly or annually and tabulated so that you see the yield change on a regular basis. Me i tend not to go mad with these figures as its a case of where do you draw the line? The yield figure is just really an indicator on how the property is performing...in my book anyway and is only really key when i am looking to buy a property. Once purchased then i tend not to focus on it too much.

The formula was given to me by a RICS surveyor who was also a property investor and he suggested that it is a better way of looking at Yields than the Gross figures, which as you have identified are inaccurate and change with the market.

As ever, i am here to learn so if i there is a better way of doing things then please let me know.

Regards

Wasim


REI said:

Wasim,

Thanks for the detailed reply.

I have never seen someone calculate net yield the way you did. Maybe it is me. Is the definition of net yield clear so there is one way to compute it? Or is the equation you are using more of a home brew version?

Net Operating Income is very much standard in the US. When I use the terms with investors in the US we all would compute it the same way. The NOI is what a building can produce in income after all expenses EXCEPT debt service, depreciation and income taxes. In other words, what the building can produce independent of the investor's capital and tax positions.

Your net yield focuses on the cash on cash return from current income after debt service but not including any other running costs (assumes tenant pays everything or ignores some of the costs). The calculation seems similar to a return of capital calculation (how long to get the initial cash paid back from current cash flow).

I am not disagreeing with your use as much as trying to understand the logic / assumptions.

John Corey
Follow me on Twitter -> www.twitter.com/john_corey
www.ChelseaPrivateEquity.com/blog

[Desiree Ratcliffe-Lattimore]

Wasim - What is a quant?

[Wasim]

A quantitative analyst is a person who works in finance using numerical or quantitative techniques. . In the investment industry, people who perform quantitative analysis are frequently called quants. We primarily work with Hedge Fund managers, and our quants mathematically model performance of hedge funds.

Although the original quants were concerned with risk management and derivatives pricing, the meaning of the term has expanded over time to include those individuals involved in almost any application of mathematics in finance.

Desiree Ratcliffe-Lattimore said:

Wasim - What is a quant?

[REI]

Wasim,

I think the surveyor got it wrong then.

The calculation is not showing how the property performs. It is showing how your investment in the property is performing. There is a stark difference.

NOI and net yield as I understand it focus on the property and not how the capital structure was put together. You want to ignore the financial engineering and see how two properties stack up in terms of income produced after expenses. The focus is on the income minus expenses that are from the property. A personal decision the investor makes in terms of finance, income taxes, and other variables that are not specific to the property. Stated differently the same property can produce different returns when you tinker with the finance while the NOI would remain the same.

What you are calculating is closer to measuring how your invested capital is doing, the pay back period or the cash on cash return.

NOI for a building can not change based on how much you do not do not put into the building. Similar to gross yield does not change if you are a cash buyer or a buyer using 100% leverage.

We are debating a technicality. The bigger message that most should take away is the need to know your numbers and to do your homework. Your post does a great job of showing how you are focused on both.

Thanks for sharing.

John Corey
Follow me on Twitter -> www.twitter.com/john_corey
www.ChelseaPrivateEquity.com/blog

Wasim said:

Hi John
I use Net Yield because its a true reflection of what is going on with the property...but i do not think its a standard calculation. It should be though as it gives you a yield based on Net Income for a property over what it has cost you to buy the property.
Any costs ie Maintenance would be deducted from the Net rent, as would service charges and agents fees if an agent was managing the property for me. This could be calculated as often as you like, weekly, monthly or annually and tabulated so that you see the yield change on a regular basis. Me i tend not to go mad with these figures as its a case of where do you draw the line? The yield figure is just really an indicator on how the property is performing...in my book anyway and is only really key when i am looking to buy a property. Once purchased then i tend not to focus on it too much.

The formula was given to me by a RICS surveyor who was also a property investor and he suggested that it is a better way of looking at Yields than the Gross figures, which as you have identified are inaccurate and change with the market.

As ever, i am here to learn so if i there is a better way of doing things then please let me know.

Regards

Wasim


REI said:

Wasim,

Thanks for the detailed reply. I have never seen someone calculate net yield the way you did. Maybe it is me. Is the definition of net yield clear so there is one way to compute it? Or is the equation you are using more of a home brew version?

Net Operating Income is very much standard in the US. When I use the terms with investors in the US we all would compute it the same way. The NOI is what a building can produce in income after all expenses EXCEPT debt service, depreciation and income taxes. In other words, what the building can produce independent of the investor's capital and tax positions.

Your net yield focuses on the cash on cash return from current income after debt service but not including any other running costs (assumes tenant pays everything or ignores some of the costs). The calculation seems similar to a return of capital calculation (how long to get the initial cash paid back from current cash flow).

I am not disagreeing with your use as much as trying to understand the logic / assumptions.

John Corey
Follow me on Twitter -> www.twitter.com/john_corey
www.ChelseaPrivateEquity.com/blog

[Anita Li]

To get the net yield , I agree to John that I would deduct any maintainence and repairs cost, service charges and agent fees.

By the way, would anyone like to share which landlord insurance you are using.

Regards
Anita Li

[Stephen Fay ACA]

Anita,

Try Sillars Insurance (01429 236 732) - excellent rates. I pay around £100 per £100k Sum Insured.

John,

Totally agree with that method for calculating the yield of the property. For me, my first thought is to complete a back of an envelope yield calculation, before even looking at finance etc. I can see what Wasim is doing with the cash-on-cash return, but also that in reality, that "return" isn't accurate as it doesn;t consider the lumpsof maintenance etc that are needed over the years.

The reality, based on years of reviewing investor's accounts, is that single-AST residential property financed at 70-80% LTV breaks even over the years. There are some exceptions, but not many.

Stephen Fay ACA
Fylde Tax Accountants
Tel: [phone]
Email: [e-mail]
Web: fyldetaxaccountants.co.uk

[Deepak Malhotra]

Hi Wasim,
Very interesting article. As you are in the mortgage industry, I am curious if foreigners can obtain mortgages there. I am in the U.S. and right now, the UK pound looks very low to me. I am trying to diversify out of the dollar and have some properties in other countries, but not in the UK.

Hi REI,
I am in the U.S. I calculate yield or cap rate as you have mentioned. Gross annual rent minus vacancy rate and all expenses other than interest, all divided by purchase price.

Of course, in that formula, there are many ways to fudge if you are making a projection. You can ignore management expenses, you can understate vacancy rates, you can understate repairs, you can overstate projected rents. So one trick I use is to make my offers contingent upon the seller providing two years of income tax information relevant to the property. When reporting to the tax authorities, an owner will be more truthful or lean towards understating income and overstating expenses. Since there is very little inflation, old numbers are very helpful at predicting future returns.

A rule of thumb that works well here (will need to be adjusted based on property taxes and vacancy rates to work in other locations) is that if I can buy a property for 100x one month's rent, it will probably generate positive cash flow with 20% down. At present, that is very hard to find here, even with values down from their peaks.


Now that I have several properties, I can guess quite well which properties will generate a decent rate of return and can guess what the rents should be.

At present, the properties that are performing the best here are single family homes with 3-4 bedrooms, 2 baths, that rent for about $1000 per month, if you can find them for under $150,000 or so. I focus on 1970s or newer to avoid a lot of expensive repairs. Though they don't meet the 100x rule, I find that the vacancy rate is extremely low, almost nonexistent, compared to my larger complexes. In addition, the tenant is responsible for all utilities including water, lawn care, garbage, etc. I can get yields of about 5%, and that is after paying a property manager.

5% does not sound like very much. But the real money in real estate comes from long term leveraged appreciation. Sure we are going through some deflation right now, and leverage does cut both ways, but deflation is very rare.


REI said:

Wasim,

Thanks for the detailed reply.

I have never seen someone calculate net yield the way you did. Maybe it is me. Is the definition of net yield clear so there is one way to compute it? Or is the equation you are using more of a home brew version?

Net Operating Income is very much standard in the US. When I use the terms with investors in the US we all would compute it the same way. The NOI is what a building can produce in income after all expenses EXCEPT debt service, depreciation and income taxes. In other words, what the building can produce independent of the investor's capital and tax positions.

Your net yield focuses on the cash on cash return from current income after debt service but not including any other running costs (assumes tenant pays everything or ignores some of the costs). The calculation seems similar to a return of capital calculation (how long to get the initial cash paid back from current cash flow).

I am not disagreeing with your use as much as trying to understand the logic / assumptions.

John Corey
Follow me on Twitter -> www.twitter.com/john_corey
www.ChelseaPrivateEquity.com/blog