Real Estate Investment & ROI Analysis Tool

If you’re looking to invest in real estate, understanding the math behind your investment – and how much money you stand to make (or lose) is critical.  We will look at: 
Your Investment 
You need to have a good understanding of all the costs that make up the initial purchase price – that’s the real amount of your investment. Your investment includes:
- Your downpayment
- Land transfer taxes
- Immediate repairs and renovations
- Home inspection cost
- Financing costs (eg appraisal)
- Legal costs to purchase the property

Income To help you decide if a property is a good investment, you need to forecast the potential income. Your REALTOR should be able to estimate potential rent, based on how much similar nearby properties are renting for. Make sure to include the following in your income calculations: Rental income for the apartment additional possible income – for example, additional rent from parking spots or garages or money earned from coin-operated laundry You should also estimate a vacancy allowance, to account for times when the property isn’t occupied or rent isn’t being paid.

ExpensesYou won’t know if something is a good investment until you estimate all of the potential costs. Make sure to include these operating and financing costs:
- Financing costs (ie, the amount of the mortgage payment)
- Heating- Electricity
- City services (garbage, water)
- Property taxes
- Condo fees (if applicable)
- Insurance- Property management
- Repairs and maintenance
- Snow removal and yard maintenance
- Pest Control

Key Investment Metrics
While experienced property investors have their own favourite ways of evaluating investment properties, the metrics they usually use include:

Cash FlowThe difference between the income and the expense capitalization or CAP RateEstimates an investor’s potential return on a property cap Rate=Annual Net Operating Income / Property Cost
Debt Coverage Ratio (DCR) DCR is the ability of the projected rent (after operating expenses) to cover the mortgage obligationsDebt Coverage Ratio = Net Operating Income / Annual Debt ServiceA DCR of less than 1 indicates a negative cash flow
Yield Annual income from the investment expressed as a percentage of the investment’s total costGross Yield = Total Rents / Purchase PriceNet Yield = (Total Rents – Operating Expenses) / Purchase Price

Return On Investment (ROI) 
A property’s Return on Investment or ROI is a combination of: 
Cash on Cash Return 
Calculates the cash income earned on the cash invested in the property
Cash on Cash Return = Cash Flow (before taxes) / Investment
Mortgage Paydown 
Every month, part of the principal of the mortgage is paid down by the rent
Mortgage Paydown = Mortgage Paydown /Investment
Appreciation 
If home prices increase, that increase in value is part of the ROI when you sell it