Real Estate Investing Formulas to Invest By

Written by Posted On Tuesday, 25 April 2017 20:04
Houses Houses

When investing in real estate, its important to have a system in place that allows you to first identify properties of interest, and second, be able to evaluate those properties.

Identifying properties that you may be interested in, can in a large part be due to qualitative factors.  Is the property in an attractive neighborhood? If the property is damaged, is it repairable and will the damage allow me to buy at the right price? These are just two qualitative factors that one might consider when buying an investment property.

But just as important as these factors are the quantitative considerations that one must think about.  Will my rent deliver attractive net cash flow above expenses? If I pay more for the property, how will it affect my rate of return?  If rent rises steadily over time, how can that affect things? If rent decreases unexpectedly, how will my return on investment be affected.

These are all things that need to be taken into consideration and unless you have a system in place in order to evaluate these quantitative factors, you might be leaving yourself vulnerable to a bad real estate deal.

In order to create a system, you need to understand a few simple formulas in order to evaluate your properties by the numbers.

Here are 3 simple formulas you can use to quickly evaluate real estate deals:

  1. Year 1 Cash on Cash Return - The year one cash on cash return is simply calculated by taking your year 1 projected cash flow, and dividing it by the amount of cash that you.  What is a good cash on cash return you ask?  That all depends but here is a good article to help you decide.
  2. Year 1 Equity Build Up Rate - This is your projected principal accrued on your mortgage in year 1 divided by your total cash invested in year 1.  This calculates a rate of return on principal growth in year 1.  This is typically small since not much of your payment goes toward principal in year 1, but it should be accounted for in your analysis.  This rate of return can be added to your "Year 1 Cash on Cash Return" to give you a total Year 1 Cash Return.
  3. Cap Rate - Capitalization rate is calculated by taking your net operating income and divided by your current market value or the price you might pay for the property.  Sometimes, this can be used to compare to other comparable cap rates in your area by acquiring this data from a database.  Cap rates fluctuate with time as price fluctuates and so a good cap rate can sometimes be considered relative.

There is definitely more you should calculate and project before diving in and purchasing a rental property, but these 3 calculations can give you a baseline from which to compare mutually exclusive investments.

Once you have it narrowed down, you might do more extensive analysis.  That's where using an online resource like a rental property calculator can come in handy.  It will allow you to calculate much more than you'd be able to calculate (in a timely fashion) otherwise.

Good luck & happy real estate investing!

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IQ Calculators

IQ Wealth Calculators created a suite of online financial calculators for individuals and realtors alike.  There are several important real estate related calculators available to use for free.  

Rental Property Calculator

https://iqcalculators.com/calculator/real-estate/

Land Loan Calculator

https://iqcalculators.com/calculator/land-loan/

 

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