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Mortgaginator

Back by popular demand, somethingsdontchange.com presents the Mortgaginator.

Run the numbers

My evaluation spreadsheet (also known as the “Mortgaginator” has evolved over the years to analyse prospective property deals. Simply fill in the yellow boxes and let the spreadsheet worry about the rest.

Below the spreadsheet is a handy glossary that decodes what some of the scary sounding words mean.

The spreadsheet is populated for a recent opportunity, demonstrating how a mediocre deal’s viability would be threatened by shocks such as rising interest rates. Amend as appropriate for your own deal.

Mortgaginator

Glossary

Gross Yield: A quick and dirty calculation to allow you to compare returns before expenses offered by similar properties.

Annual Rental Income / Property Valuation

Net Yield / Cap Rate: Measures the property’s cash flow relative to its value. The dividend yield of the global stock market is about 2%, so if the result is less than that there is easier money to be made elsewhere.

Annual Net Income / Property Valuation

Cash on Cash Return: Measures the rate of return on the cash you are putting into the deal.

Annual Net Cashflow after financing / Investor’s cash contribution

Self Funding Period: The number of years it would take for the property to pay the investor back their initial cash contribution.

100 / Cash on Cash Return

Debt to Equity Ratio: Reports the proportion of the property’s value that has been financed by borrowings. The higher the number the more heavily leveraged the property is.

Mortgage Amount / (Property Valuation – Mortgage Amount)

Fair Value Test: A very rough assessment of the property’s rental income versus its market value. A value of less than 100 is expensive, greater than 100 is cheap.

Annual Rental Income / (52 Weeks in the year * 1,000) / Property Valuation

One Percent Rule: Under this rule of thumb the monthly rent should be 1% or more of the property’s market value, providing an annual gross yield of 12%. When applied alongside another rule of thumb, that the cost of operating a rental property is roughly 50% of the rental income it commands, reduces that annual yield to 6%.
If a property doesn’t meet this threshold the investor would likely get a better return, with less hassle, investing in a low cost index tracker fund instead.
I treat this rule of thumb a little bit sceptically as I think the “50% rule” overstates the running costs of a property, while underplaying the realistic financing costs. It can be a good triage tool though, to help filter out really rubbish deals.

Monthly Rental Income / Property Valuation

Investor Accumulated Equity: Reports the amount of equity the investor has accumulated in the property.

Property Valuation – Mortgage Amount

Maximum Permissible Mortgage: The maximum amount a lender will lend against a property, as determined by the Loan to Valuation Ratio.
Maximum Supported Repayment Mortgage: The highest mortgage value the property’s net income can service, given the supplied loan interest rate, term and repayment frequency. Exceed this and you’ll be subsidising your tenant’s living costs!
Maximum Supported Interest Only Mortgage: The highest mortgage value the property’s net income can service, given the supplied loan interest rate, term and repayment frequency. Exceed this and you’ll be subsidising your tenant’s living costs!

Health warning

Never forget that you must repay the mortgage principle at some point, regardless of how many times you may refinance along the way. Ensure you have a plan for how you will pay off the property.

Next Steps

  • Run the numbers on your home using the Mortgaginator. Does it make more sense to rent or buy?
  • If you liked this post then please share it with your friends.
Disclaimer: I may receive a (very) small commission from any purchase you make via links on this website.