8 figures to evaluate a real estate investment

You must have 8 figures to evaluate a real estate investment:

Extremely low real estate prices can be tempting for some novice real estate investors looking to break into the market. But, before joining the angel class, make sure you have a complete understanding of the financial information that can make the difference between a successful endeavor or a situation turning out to be a loss.

Here are eight key real estate investment numbers you need to know how to calculate and use when evaluating a potential investment property.

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Investing in real estate often generates relative capital gains in addition to rental income.

Each property is evaluated based on its unique characteristics, such as design, location, and amenities. Finishing, facade, view and other characteristics.

However, many other key data can be calculated for any property and allow potential investors to make projections and comparisons of different properties.

Here we talk about eight important metrics that every real estate investor should be able to use to value a property.

8 Numbers for evaluating real estate investment

1-Your mortgage payment

For a standard owner-occupied home, lenders typically prefer a total debt-to-income ratio of 36%, but some will go as high as 45% depending on other qualifying factors, such as your credit score and cash reserves. This ratio compares your total monthly income to your monthly debt obligations. For property payments, lenders prefer gross income to gross property payments at a ratio of 28% to 33%, depending on other factors. For investment property, the guidelines say the maximum debt-to-income ratio is 45%.

. 2- Down payment requirements

While owner-occupied properties can be financed with a mortgage, real estate loans for investors usually require a down payment of 20% to 25% or sometimes as high as 40%. . Lenders will determine how much you need to pay to qualify for a loan depending on your debt-to-income ratios, credit score, property price, and potential rent.

3 . Rental income to qualify

While you might assume that since your tenant's rent proceeds will cover your mortgage, you don't need the additional income to qualify for a home loan. However, for rent to be considered income, you must have had arrangements for at least two years to manage the investment property, have accounted for a rental loss for at least six months of your total monthly rent, and any passive rental income from any rental properties must be considered debt in proportion. debt to income.

.4 price-to-income ratio

This ratio compares the price of the property to your average income.

 5. Price-to-rent ratio

The price-to-rent ratio is a calculation that compares average property prices and average rents in a given market. Simply divide the average property price by the average annual rent to create a ratio. As a general rule, investors should consider buying when the percentage is higher than 4% for residential properties and higher than 7.5% for administrative and commercial properties. Markets with a high price/rent ratio do not usually present a good investment opportunity.

6.  Total rental yield

The total rental yield for an individual property can be obtained by dividing the annual rent received by the total cost of the property, then multiplying that number by 100 to get the percentage. The total cost of the property includes the purchase price and all contracting and renovation costs.

7.  Capitalization rate

The most valuable number of total rental yield is the capitalization rate, also known as the cap rate or net rental yield because this figure includes the operating expenses of the property. This can be calculated by starting with the annual rent and subtracting the annual expenses, then dividing that number by the total cost of the property and multiplying the resulting number by 100 as a percentage. Total property rental expenses include repair costs, taxes, landlord's insurance, vacancy costs, and real estate broker fees.

8.  Cash flow

If you can cover your mortgage's principal, interest, taxes, and insurance with your monthly rent, you're in good shape as a landlord. Just make sure you have cash reserves on hand to cover this amount in case a job becomes vacant or you need to cover unexpected maintenance costs. Negative cash flow, which often occurs when an investor borrows a lot of money to buy the property, can lead to a loan default unless you are able to sell the property for a profit.

Conclusion

Once you have made all of these calculations, you can make an informed decision as to whether a particular property would be a valuable investment or not.