Yield, Equity & ROI when following a Buy, Refurbish, Refinance strategy?

[Tassle]

Hey all,

Can anyone clarify how Yield, Equity & ROI should be calculated when following a Buy, Refurbish, Refinance strategy?
Most online resources only discuss these in terms of purchasing a property and letting it out / selling it, rather than refinancing it. I want to make sure my metrics are comparable with everyone else's!

Theoretical BRR Scenario:
I buy a property for £120k using a bridging loan and a deposit of £48k
I spend 6 months renovating it, with the finance costs & renovation totaling £25k
I then refinance onto a BTL mortgage with the property valued by the mortgage co at £180k and a deposit of £72k (mortgage £108k)
This releases £35k once the original deposit (£48k) & costs (£25k) are deducted
The net rental income of the property is £4.5k pa

Yield
= Net profit / Cost
But is this the original purchase cost (£120k) or the valuation (£180k)
3.75% or 2.5% ?

Equity
= The market value of a property - the debts secured against it
I'm pretty sure I know the answer to this, but confirm that 'debts' does not include debts to me (ie. the £25k)
It's simply £180k value - £108k mortgage = £72k

ROI
=Annual profit generated / money invested
Am I right in calculating it like this:
4.5 / ( 48 + 25 + (72-48))
4.5 / 97 = 4.64%

Thanks for the help, it's much appreciated!
(and yes I realise that no matter how it's calculated, the returns on my example are terrible!)

 

[Longterminvestor]

Hi @Tassle

First of all welcome to the forum. I have added a few notes to your questions which I hope are helpful.

Yield
= Net profit / Cost
But is this the original purchase cost (£120k) or the valuation (£180k)
3.75% or 2.5% ?

Comment: I would better describe this as the running yield and use the £180k figure. That way you will be able to compare and contrast against other property investments much easier. If for example you see a property for £200,000 with a net rental income of £10k then the net yield is 5%.

Equity
= The market value of a property - the debts secured against it
I'm pretty sure I know the answer to this, but confirm that 'debts' does not include debts to me (ie. the £25k)
It's simply £180k value - £108k mortgage = £72k

Comment: This one is fairly simple as you say - the debt to you is actually an investment and part of your equity in the property.

ROI
=Annual profit generated / money invested
Am I right in calculating it like this:
4.5 / ( 48 + 25 + (72-48))
4.5 / 97 = 4.64%

Comment: The easiest way to calculate this is to use the net rental figure of £4.5k and divide this by the amount of money you physically put into the property (your own cash). I am unclear whether you only invested £48k or topped it up to £72k with your own funds? As the net rental figure will take into account running expenses and mortgage interest payments this will give you a clearer picture.

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[Tassle]

Hey LTI,
Thank you for such a detailed and helpful response.

Equity
Afraid I wasn't clear from your comment - you're agreeing that I should not include my own costs incurred (eg refurbishment) as debts when working out equity?

ROI
Apologies, I realize I made a mistake in my example! I’ll repeat it with what I believe is correct which hopefully should make far more sense!:

Theoretical BRR Scenario:
I buy a property for £120k using a bridging loan and a deposit of £48k (loan £72k)
I spend 6 months renovating it, with the finance costs & renovation totaling £25k
I then refinance onto a BTL mortgage with the property now valued at £180k.
The new deposit is £75k (mortgage £105k)
£35k of the new mortgage can be withdrawn as cash once the original mortgage is paid off (£105k - £72k).

In summary, I’ve put in £73k in cash into the project, but I’ve released £35k capital back out. Hence there is £41k of my cash stuck in the project.

If the net rental income of the property is £4.5k pa, would my ROI be:

4.5/73 = 6% (based on the total cash I put in)

Or

4.5/41 = 11% (based on the investment that ends up remaining in the project?)

I'm grateful to you for taking the time to help with this. Apologies that it wasn't clear first time round
Thanks for the suggestion, I'll take a look at the ebooks!

Adam

 

[PostBrexitInvestor]

If the net rental income is £4.5k and you have only £41k equity invested in the property then your return on investment is 11% - i.e. after finance and running costs have been deducted this is your net income. Very nice if you can get it!

As for the equity, as you have funded renovations through your own money, not a loan, I would class this as equity.