Being an investor, the most irritating time is when you are
required to do the math. But the matter of fact is that you will have to be
good in your calculations because this is the only way you can check if your
real estate business is going fine.
Having that said, below mentioned are a few calculations
which you need to be good at if you want to earn well through your real estate
business.
Cap rate
“Net Operating Income / Total Price of Property”
When it comes to valuing apartments and bigger commercial
buildings, this is the formula you can use to find out if the property is worth
investing in. Here, you would want the cap rate number to be the least one.
Typically, a cap rate of 8 is considered ideal but it is not always possible to
get it.
Rent/Cost
“Monthly Rent / Total Price of Property”
If you want to calculate the value of small rental apartment
building, Rent/Cost can be quite helpful in giving you the value of the
property. Now, the properties in bad neighborhoods are not going to give good
number if you do the calculation of value through this formula.
According to a survey, national average of properties with
respect to Rent/Cost is 0.7%. If you want to get a property that gives you better
cash flow, this value should be above 1%.
Gross Yield
“Annual Rent / Total Price of Property”
Technically, it is the same type of calculation which is
mentioned above. However, this calculation comes in handy when you are required
to value to the portfolio. Generally, it serves the same purpose as that of Rent/Cost.
Debt Service Ratio
“Net Operating Income / Debt Service”
This is the number the banks look at when you apply for real
estate financing. Generally, the banks are going to look at the property debt
ratio and you global debt ratio in order to make a decision about financing
your real estate investments.
Now, if the calculation gives out the figure 1.0 or less, it
means you are going to lose money every month. Hence, the banks may not consider
financing you based on this result of calculation. However, anything above 1.0
makes you eligible to get the financing from banks. Typically, banks consider
1.2 as the ideal number in this regard.
Cash on Cash
“Cash Flow / Cash in Deal”
This one is among the most important calculations. It helps
you in determining the type of return you are getting in your investment. This
calculation is important not only in valuing the property but it also helps in
evaluating what type of debt or equity structure is it that you can use to
purchase the property.
