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Archives for February 2019

How to Calculate Yield of Property Investments

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The many factors that boil into what makes a property valuable can eventually be traced to one thing you want to know. That desired number is what is known as your property yield. A healthy return on your real estate investment is vital toward maintaining your lifestyle and prosperity. Ergo, you may want to conceptualize how much your property is going to earn for you.

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What Factors Affect Property Yield
How to Calculate Yield
Why Is Knowing Your Property Yield Good

Your property yield, in basic terms, is how much of a annual return your property will earn. There are many sort of factors that determine what your precise yield will actually be, all of which can be included in the calculations. Starting off with a baseline estimated return is the best place to start with, however. This isn’t something that can be overlooked, especially if you’re expecting to break even on your owned property.

What Factors Affect Property Yield

Saying “everything is a factor” would be true, but that’s not helpful. When we talk about how to calculate yield, we can look at how it can develop in two ways: gross and net. Both are estimations of how much profit you’ll have either gained or lost by the end of the year.

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Gross Yield vs Net Yield

Your gross yield will be a plain percentage without accounting for outside factors. Net yield will be the percentage of what you actually make at the end of the year.

While your net yield is the final determinant of how much return you made that year, it’s a little more flexible than gross yield is. 

However, keeping in mind that expenses will occur gives you the motive to prepare for them. Preparing for the worst as a contingency helps maintain profit, high returns, and mitigate losses.

There are still some calculations you can perform to account for expenses. It may not be perfect, but it gives you a good picture of what to look for. 

So what can happen that will have an affect on your property yield?

Tenants

We’ll start with the tenants. If you’re leasing or renting out a property, then the property yield will be directly sourced from those who occupy the space. Depending on the year, you can raise to boost profit or lower rent to entice residents to stay. Ultimately, since your tenants are going to be constantly occupying the property, they’re going to change your property yield by the end of the year.

Tenants may end up causing damage to your property, or not informing you quickly enough about parts that need repairs. Any damage that occurs cuts into your net profits at the end of the year. On the reverse end, you may have a property that doesn’t have tenants at all. As long as it sits unoccupied, you aren’t making a return.

Repairs and Running Costs

Let’s not blame the tenants for everything, though. With time comes damage, and properties are prone to suffer from external sources at some point. Repairs are a necessary aspect of maintaining a quality property to ensure further return. It’s not pleasant, but it must be done regardless.

You’ll need to keep up with running costs as well. Service charges, insurance fees, and the like are going to be steady, reliable costs on your property. Thankfully, running costs are much easier to keep track of.. As far as accounting for your expenditures, you can at least rely on running costs for their consistency.

Fees are a natural part when dealing with upkeep on your properties. These can range from property management fees to stamp duty. Regardless, they’re going to bite into your overall return.

How to Calculate Yield

investors and agents learning how to calculate yield of investments

There are two different calculations to perform if you want to find either your gross or net yield. Successful management of your properties requires an authoritative grasp on your potential returns by the end of the year. Knowing all of your property yield outcomes will help you achieve the highest return at the end of the year.

Both the gross and net yield calculations return as percentages. When learning how to calculate yield, you will be comparing everything against the initial market value of the property when you purchased it. For example, if you purchased a property for $150,000, then every property yield will be working toward covering that cost, so to speak.

Calculating Gross Property Yield

Let’s start with covering how to calculate gross property yield. As we said before, gross property yield is going to be a fairly straightforward equation. Simply put, you’re calculating how much money you’ll receive from your tenants as a percentage of the property’s overall value. 

You’ll only need two pieces of data: the annual rental income and the market value of your property.

To find the annual rental income, multiply your tenant’s weekly rental payments by 52. If they pay monthly, multiply it by 12. That number will the annual rental income you receive from your property. If, for example, your tenant’s pay $1,200 a month, then you will annually receive $14,400.

You should already know the market value of your property. For learning purposes, let’s set the market value of said property at $100,000. Take your annual rental income and divide it by the property’s market value. 

From there, multiply it by 100 to calculate your gross yield. With an annual payment of $14,400 compared to a property marketed at $100,000, your gross yield is 14.4%.

For ease of viewing, your equation should look like this:

  • Gross rental yield = Annual rental income (monthly rental income x 12) / market value x 100 

With nothing else considered, if you continued having tenants occupy your property and consistently paid their rent, you would pay off what you initially paid for the property in seven years. From then on, you would be making positive income on your property. Unfortunately, it doesn’t usually work as smoothly as that, due to expenses.

Knowing how to calculate yield involves having a firm understanding of what your net yield will be as well as the gross. For the most part, the net yield is going to be more realistic, and should be what you take into account for more seriously.

Calculating Net Property Yield

To calculate net yield, you need three distinct pieces of data: annual rent income, annual expenses, and total property costs.

To start with, you’ll need to subtract your annual expenses from your annual rental income. This is going to give you the de facto amount you’ll have profited after all expenses are paid. To find the percentage you’re looking for, divide your end-of-year return from the total property costs. The total property costs include the initial purchase of the house, as well as transaction costs.

Once you’re finished, multiply it by 100 and you’ll have your net yield. While the net yield may not be as exact as the gross yield, due to estimations, it’s far more valuable. While the gross yield calculates what your maximum return could possibly be, it’s not exactly realistic since it doesn’t account for expenses.

Your equation should look a little something like this:

  • Net yield = (Annual rental income – Annual expenses) / (Total property costs) x 100
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Why Is Knowing Your Property Yield Good

It’s simple really. It all comes down to evaluation and planning. Real estate is in constant demand across the United States, and that demand has a heavy effect on your yield when you’re purchasing a property. High demand for real estate means that you’ll need to pay more to invest in a property, and that will impact your overall return. However, vice versa, in times when properties are not in demand, you’ll gain the benefit by purchasing real estate at a lower asking price and increasing your overall return. Regardless of when you’re looking at a new property, you need to make sure you have a plan in place to account for your expense. Frankly, real estate is expensive, and you want to pay off that expenditure as quickly as possible. If you know what your gross and net yields are going to be, then you’ll have better game plan ready for when you begin leasing or renting out your space. Make sure you’ve calculated your expenditures, your returns, and your liabilities before making any decisions.

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What Makes A Qualified Investor

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As much fun as it could be, your random average joe won’t be able to walk up off the street and haphazardly invest in whatever they like. 

Did I say fun? I meant disastrous.

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So What Makes a Qualified Investor?
What You Will Need to Prove You’re a Qualified Investor
Completing Minimum Requirements
Common Qualified Investor Pitfalls
Final Thoughts on Qualified Investors

A market without some measure of verification could be easily run amok by bad trades, illegitimate investors, and fraught with a calamity of issues. Those who want to have the full scope of investing need to become accredited.

Becoming a qualified investor, otherwise known as an accredited investor, is essentially a status symbol. 

It’s a show of credit that you’re qualified to make investments in hedge funds, venture capital funds, private equity offerings, and more. 

Once you’re approved to legally invest in these sectors by the Securities and Exchange Commission, you’ll gain access to a whole new investment field.

So What Makes a Qualified Investor?

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Glad you asked. As you may have ascertained yourself, there’s certain criteria you’ll need to meet in order to become a qualified investor. 

There aren’t any tests or bar exams to pass, just proof that you can put your money where your mouth is. If you’re planning on becoming a qualified investor, make sure you have all your necessary documents on hand. The Securities and Exchange Commission will need it for verification.

How Much is Your Yearly Income?

The primary method of verifying whether a potential investor can be qualified is by examining their yearly income. If you’re independently earning a strong, steady income, then you only need to have an annual earning of $200,000. With an income of this magnitude, you’re considered a reliable investor who’s worth qualification.

Alternatively, if you have a spouse, then your total annual yearly income can be capped at $300,000 instead of $200,000. While that is a little bit more, it’s more easily achievable than being solely responsible for independently earning $200,000 a year. For instance, if both you and your spouse earn $150,000 yearly, then you can be a qualified investor.

a man throwing dollar bills

Of course, if this is the first year that you’ve earned $200,000, you won’t quite be able to become a qualified investor. You’ll need to prove that you’ve consistently earned this hefty sum for three years in total. If you’ve earned an annual figure of $200,000 for the previous two years and have reasonable expectation you’ll earn the same come the end of this one, then you can qualify.

How Much is Your Net Worth?

Simply making a decent income isn’t the only requirement needed to be verified as a qualified investor. While your annual income is the most secure and manageable method, your net worth is just as valid and necessary. Anyone who has a net worth of over $1 million qualifies, even if they don’t meet the minimum yearly income. However, you can only be considered as being worth $1 million and still be a qualified investor if you do so without including your primary residence.

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This addendum for the rule was passed with the Dodd-Frank Act, which was in turn passed in response to the housing crisis of 2008. The purpose was to lower overall risk regarding investors to prevent further collapse in the future. By excluding the primary residence from being included as a part of net worth, investors are forced to be more financially transparent.

This addendum for the rule was passed with the Dodd-Frank Act, which was in turn passed in response to the housing crisis of 2008. The purpose was to lower overall risk regarding investors to prevent further collapse in the future. By excluding the primary residence from being included as a part of net worth, investors are forced to be more financially transparent.

Essentially, you can live in a lavish house, but make less that is minimally required to function as a qualified investor. Such an inclusion in the act ensures financial safety, stability, and accountability regarding any future investments.

What You Will Need to Prove You’re a Qualified Investor

For the most part, becoming a qualified investor isn’t like joining a club. There are no badges, certificates, or processes to jump through before receiving the honor. The bonus of being a qualified investor is having access to a variety of unregistered securities. 

Securities are stocks, bonds, and notes that can be sold to the public. However, they have to first be registered with the SEC before going on the market.

Selling an unregistered security is considered a felony. However, there are exemptions to the law. In this case, that exemption falls under selling unregistered securities to qualified investors. This is a small market of people, since the investment world is primarily populated by unaccredited investors who don’t meet the qualifications. It’s an incentive of sorts to aim for that particular criteria of members.

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Completing Minimum Requirements

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The minimum requirements, as we’ve gone over, are the first step toward becoming a qualified investor. However, there’s no actual formal accreditation system to automatically permanently verify a qualified investor. Sellers need to run verification themselves. It’s the due diligence to ensure everything is above board.

The first step of verification is filling out a questionnaire provided by the issuer of securities. The purpose of this questionnaire is to provide the essential information verifying any qualified investor. Included with a finished questionnaire will typically be a few essential documents. These usually include financial statements, account information, and other verifiable forms of asset liability.

Credit Report Investigation

Following this first step, interested companies will generally investigate your credit report. Your overall score is going to be keenly considered. For the most part, however, the past three months of any sort of information you provide will be most valid. Making sure all your information is up to date will make the verification process smoother and more reliable.

Annual Income Verification

With all things considered satisfactory so far, a few of the last important documents will be to verify your annual income. Those who qualify via a net worth of over $1 million are not subjected to this step as often. For those who are qualified investors due to their annual earnings, prospective sellers will want to ensure your forms are accurate.

Prepare your W-2’s and tax returns beforehand to ensure immediate compliance. Though these are the two most common and readily available methods, any documentation that record official income will suffice. Letters from an attorney, investment broker, or a CPA can accomplish the same verification fulfilment.

Common Qualified Investor Pitfalls

Knowing what makes you a qualified investor is a good start, but there are certain caveats to be aware of so you don’t make any unwarranted mistakes. Due to the nature of purchasing unregistered securities, the advantage is a double-edged sword. They may be valuable, but they also carry more risk.

couple using a laptop

Since these unregistered securities are exactly what they say they are, they aren’t regulated by the SEC. The onus of finding a good deal on these investments involves extra effort on your part to validate them. 

Doing your own homework and due diligence will become a must to ensure you aren’t making a bad investment. This, unlike with regular regulated stocks, carries more of a challenge on your half of the deal.

Joining an investment group should be a priority when dealing with unregulated securities. 

While you won’t have the same support as the regular market, having other investors to bounce your opportunities off of can add needed assurance, warning, and competence.

Qualified investors will also need to deal with higher fees and higher minimums to stay in the market. As long as you have a sustainable bank account with cash flow, you should be alright. However, the higher the fees, the more they will eat into your returns. Any expectations for investments similar to those regulated by the SEC should be kept low.

Final Thoughts on Qualified Investors

Being a part of a lucrative circle of investors has its ups and downs. 

What doesn’t? 

For the most part, however, if you’re skilled, the benefits outweigh the detractors. 

Having the capability to quickly capitalize on investment opportunities without having to fight with non-accredited investors is invaluable. 

You’ve heard the phrase “the early bird gets the worm” before.

To make the best out of being a qualified investor involves dedication and a standard to yourself. While you have an immense opportunity, it can just as easily bite you if you aren’t careful. 

So long as you do your due diligence, ensures your papers are in order, and stay on top of your investments, becoming a qualified investor could be the best decision you’ve ever made.

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