The interactive application below implements the real estate investment strategy described in The Book on Rental Property Investing: How to Create Wealth and Passive Income Through Intelligent Buy & Hold Real Estate Investing! by Brandon Turner. The app can be used to assess the current and future value of a real estate investment.
This model of a real estate investment relies on three categories of investment parameters. Transactions and mortgage parameters are all associated with the initial purchase and loan. Monthly rent and expenses represent all recurring costs and income on a monthly basis. And then appreciation and sale are all parameters associated with the final sale.
The application automatically calculates investment metrics from investement parameters. Categories of investment metrics include initial investment metrics representing metrics relevant at the initial purchase, monthly investment metrics representing monthly cash flow calculations, and then final investment metrics that include the total annual return and other metrics determined at the time of sale.
Modify the investment parameters below to update the investment metrics and assess the current and future value of a real estate investment. Go to the Investment Charts tab to view the dependence of any metric on any parameter (all else being equal). The case study below the application is a full explanation of the calculations behind the application.
This case study reflects default investment parameters in the interactive application. The case study describes an assessment of a rental investment property. A similar use of the interactive application could apply to a single family home, e.g. by setting the monthly rent and vacancy costs to zero.
The initial investment metrics are determined at the time of the initial purchase. The principal initial investment metric will be the total invested capital, which represents all capital required to close the deal.
The monthly investment metrics apply every month between the initial purchase and the final sale. It is critical to understand the full monthly cash flow equation and not to leave out any term that could impact monthly expenses.
def get_monthly_mortgage_payment(amount, interest, term): """ return a monthly mortgage payment from the loan amount, interest rate, and term in years """ # get the modified interest rate and term in month units interest = interest / 100 / 12 term = term * 12 # calculate and return the mortgage monthly payment sum = 0 for i in range(int(term)): sum += (1 + interest) ** i return (amount / sum) + (interest * amount)
The final investment metrics can be defined and calculated, however the exact numbers will be uncertain because annual appreciation and the number of years the property will be held can be difficult to estimate. For example, decreasing the estimate of annual appreciation in the case study from 4% to 2% (using the interactive application) removes several points from the total annual return of the investment. The investment charts tab of the application can be used in this case to visualize how annual appreciation (or any other investment metric) impacts the total annual return.
def get_mortgage_balance(amount, interest, term, hold): """ return remaining mortgage balance after 'hold' years the mortgage is defined by amount, interest, and term """ # get the modified interest rate, term, and hold in month units interest = interest / 100 / 12 term = term * 12 hold = hold * 12 # calculate and return the remaining mortgage balance sum1, sum2 = 0, 0 for i in range(int(hold)): sum1 += (1 + interest) ** i for i in range(int(term)): sum2 += (1 + interest) ** i return amount * (1 - (sum1 / sum2))
The case study represents a positive opportunity for a real estate investment, because the equivalent total annual return of 14.9% beats the same for other average investment returns. The risk is that the real annual return will be lower because investment parameters were not estimated correctly. The interactive appliation is meant to be used to explore the impact of errors in the estimated investment parameters, to quantify the risk and ultimately to assess the current and future value of a real estate investment.
One interesting relationship to be aware of is the dependence of total annual return on the number of years the investment is held. Though it is true that profit can only increase over time (assuming only positive appreciation), it is not true that total annual return can only increase over time. For the default parameters of the case study, the investment charts tab was used to determine that 5 years would be the optimal holding years to maximize the total annual return (all else being equal), and that total annual return will decrease thereafter. The profit would continue to increase after 5 years however, so a decision would need to be made as to which metric is more important.
Please comment or reach out with your feedback or for more information on the interactive application.