Investors who often use a real estate calculator, or several, likely have a trustworthy system in place for identifying the best possible investment deals. Below you will find a comprehensive guide to the most commonly used investment property calculations so that you may discover the best type of real estate calculator for your investing business.
10 Real Estate Investment Calculators
Investing in a property can be exciting, but taking the time to properly analyze your deal is paramount. In some cases, what may seem like a good deal at first glance may cause financial pitfalls long-term. Similarly, when comparing two or more possible investment opportunities, one property may seem to offer a great investment up front. In contrast, the other offers the best return over time. To uncover the best possible investment deals, commit the following real estate investing calculations to memory:
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The Only Real Estate Investment Calculators You’ll Ever Need
There are several must-know numbers and calculations if you ever hope to analyze investment properties effectively. Below, not only will you find a comprehensive guide to the only formulas you’ll ever need, but free real estate investment calculators to make your property valuation process a breeze:
Mortgage Payment: The formula used to calculate mortgage payments is quite complicated as it requires multiple variables, such as home price, down payment, loan term and interest rate. In addition, the variables are expressed in months, so it is required to convert the interest rate and loan term before calculating the formula. The good news is that there are hundreds of free real estate mortgage calculators available, such as this one from Bankrate.com. In addition, online calculators provide the option of factoring in tax and insurance payments.
Capitalization Rate: The capitalization rate helps investors to evaluate the net income produced by a property, relative to its total purchase price. Because the cap rate also factors in vacancy rates and operating expenses, it is favored by the investment community as one of the most accurate methods of comparing similar income properties. Proapod.com offers a user-friendly cap rate calculator.
Rent Cost Ratio: The rent-to-cost ratio is a helpful tool for quickly comparing income values between similar properties in a given area. The cost in this case is the total investment cost for a property, including the cost of repairs and renovations. Investors should target properties with a rent-to-cost ratio above 1%, and then make sure to perform more in-depth cost benefit analyses. Use this helpful ratio calculator, which converts ratios into percentage rates automatically.
Gross Yield The gross rental yield provides investors with an idea of how much income a property generates, relative to its total purchase price. Shown as a percentage, a higher rental yield signifies a better investment. Gross yields are especially helpful when conducting income property market research. Investors can first target regions or zip codes with a strong average gross yield rate to help narrow down their property search. Use this simple gross yield calculator from Onproperty.com.
Debt Service Ratio Financial institutions will closely examine a property’s debt service ratio before financing a deal. Properties with a debt service ratio under 1.0 will lose money each month, so investors should pay close attention to this number. The calculation requires the annual debt service, which is the amount of payments to be made on a loan over 12 months, including interest payments. Luckily, there are debt service calculators available, such as this one here.
Cash-On-Cash Return: Investors tend to pay keen attention to cash-on-cash return because it calculates exactly how much of their investment they will earn back (in cash) in one year. This calculation not only helps to compare the profitability of investments, but can also help investors to decide what debt or equity structure to employ when financing the deal. For a user-friendly real estate investment return calculator, go here.
The 50% Rule: A good rule of thumb to be familiar with is the 50% rule, which helps provide a rough estimate of what your operating expenses should be relative to a property’s operating income. When comparing several income properties, be wary of those that have probable operating expenses that exceed 50% of the operating income. It should be noted, however, that the appropriate level of probable operating expense will be relative to the grade, such as age and condition, of the property.
After Repair Value (ARV) Calculating a property’s after repair value (ARV) comes in handy for investors who want to know a property’s projected value after renovations are made. It should be noted that the renovation value will often exceed the actual cost of making the renovations. REI/kit offers a powerful calculator that will help you estimate ARV based on neighborhood comparisons.
70% of ARV Rule: 70% of after repair value (ARV) is an important rule-of-thumb for investors to remember, as it helps create a guideline for coming up with a maximum bid price on a rehab property. In general, the maximum offer should be roughly 70% of the projected after repair value, minus estimated repair costs. The purpose of the 70% rule is to help investors create a safety buffer to ensure that they can retain 30% of the earnings, as well as provide a cushion in case the rehab turns out to be more costly than originally estimated. For a helpful online calculator, go here.
Square Footage: Correctly adding up the square footage has a great impact on what sellers can set as the asking price for a property. The rule of thumb here is that only finished spaces should count toward a property’s square footage. In addition, make sure to include spaces such as vaulted ceilings. To calculate square footage, simply get out a tape measure and start noting down the dimensions of each finished space in your property. You can use an online calculator, but if you are in the act of measuring, you may find a smartphone application more useful.
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5 Property Valuation Tips To Commit To Memory
If you gleaned anything from the guide to real estate investment calculators above, perhaps it’s that there are many helpful formulas to ensure that you can identify the best possible investment deal. However, it can be easy to mix them up or misinterpret calculations. To help you avoid such missteps, here are 5 property valuation tips to abide by:
Spend time collecting common data points from each property before running comparisons. When learning about which real estate calculators are used most often, you will discover that there is a common set of property data points that are used repeatedly. To save yourself time and effort, make a habit of automatically making a note of the most commonly used numbers for each property of interest. The purchase price, rental income, net operating income, estimated repair costs, and operating expenses are a few examples of data points used in many calculations.
Be thorough and meticulous when estimating property expenses. An estimate of property expenses is required to calculate important data points such as net operating income, rental yield, and capitalization rate. Because of this, not having a proper estimate of expenses can throw off all of your real estate calculations, thus leading to the risk of investing in a bad deal. To come up with a good estimate of expenses, contact local landlords and property management companies to inquire about property expenses for similar properties, as well as running your own thorough analysis.
Apply the same metrics and standards when analyzing each property. Failing to run the same calculations for every property of interest defeats the purpose of performing a thorough comparative analysis. By consistently running the same set of calculations for each property, you will develop your own metrics and benchmarks for separating good and bad deals.
Make use of spreadsheets and online calculation tools. Because running several calculations for every property you come across can be tedious, save time by developing a system of spreadsheets and online calculators to run your analyses for you. Pre-program a spreadsheet with the necessary formulas so you can plug in data points. In addition, making use of technology helps to minimize human error.
Predetermine and stick to a set of standards and guidelines. Real estate investors will develop their own standards and guidelines to identify profitable investment deals over time. Having guidelines will help investors streamline their property searches and help them avoid potentially bad deals.
How Much House Can You Afford?
The size of your mortgage should be determined by looking at your current income and outstanding debts. These two numbers will help you use the 28/36 rule and determine how much house you can afford. The 28/36 rule states that your monthly housing expenses should not take up more than 28% of your monthly gross income (your pre-taxed income). It also requires your monthly debt repayments not to exceed 36% of your gross monthly income. Debt refers to car payments, credit card bills, student loans, or any other debts you may have. You can use these numbers to help you narrow down an ideal price range for your future home. Lenders will also use this information when approving your application — though there are several homeownership programs in case your debt-to-income ratio is too high.
What Is A Good ROI On A Rental Property?
A good ROI on a rental property is between 5 and 10 percent. Although, the right answer will vary from investor to investor. When calculating, be conservative in your estimates to avoid overshooting your cash flow. And, always use ROI alongside other evaluations. These practices will help you sort through potential deals as you expand your portfolio.
Another good rule of thumb is to consider properties with a minimum of $100 a month in cash flow (though ideally, this amount will be higher). Or, calculate an amount of your own that considers the cost of your time and work. You will become more familiar with the definition of a “good” ROI the more you work with the calculation. In time, you may identify a target range for all of your potential investments.
Hopefully, in this comprehensive guide, you have found at least one real estate calculator that you plan to enlist in your next deal analysis. Using these formulas is an efficient way to account for your real estate costs and expenses to keep your business goals on track. Minding your due diligence and thoroughly running your numbers will not only help you detect bad deals but will help build your investment portfolio most profitably. Remember to refer to these systems that help improve your success rate and put you on the path to generating greater wealth.
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