Low prices of real estate can be tempting for some novice real estate investors who want to court for bankruptcy .
Here are eight real estate investment numbers you need to know how to calculate and use when evaluating a potential investment property.
Key findings
Real estate investments can bring in both capital gains and rental income.
Each property will be rated based on its unique attributes such as layout, location and amenities.
However, some other key data can be calculated for any property and allows potential investors to make predictions and compare apples to apples.
Here we look at eight essential metrics that every real estate investor should be able to use to value property.
1. Your mortgage payment
For a standard owner-occupied home, lenders generally prefer a total debt to income ratio of 36%, but some can go up to 45% depending on other qualifying factors such as your credit rating and cash reserves . This ratio compares your overall gross monthly income with your monthly debt obligations. As for housing payments, lenders prefer the total income of the total housing payments to be between 28% and 33%, depending on other factors. For investment properties , Freddie Mac management says that the maximum debt-to-income ratio is 45% .1
2. Requirements for prepayment
While the property is owner-occupied, it can be financed with a mortgage and only 3.5% of the loan amount the FHA , mortgage loans to investors usually require a down payment in the amount of 20% to 25%, and sometimes up to 40% .Ni initial fee, no cost to the closing of the investment property can not be a gift from fondov.Otdelnye lenders will determine how much you need to invest in order to qualify for a loan, depending on the ratio of your debt to income, credit rating , real estate prices and the likely rent. 3
3. Rental income for confirmation
Although you can assume that since your tenant's rent will (hopefully) cover your mortgage, you won't need any additional income to be eligible for a home loan. However, in order for rent to be considered income, you must have two years of Real Estate Agent in Minto experience in managing investment properties, purchase loss insurance for at least six months of your total monthly rent, and any negative rental income from any rental property must be considered debt in the ratio of debt to income.
4. Value for money and income
This ratio compares the average household price in the area to the average household income , which was 3.3 in 2011, following a housing bubble, 3.2 in 1988, and about 4.0 in October 2020. as the housing bubble collapsed, it was at a peak of 4.66.5
5. Price-to-rent ratio
A price-to-rent ratio is a calculation that compares the median home prices and the median rent in a given market. Simply divide the average home price by the average annual rent to get the ratio . As a general rule , consumers should consider buying when it is the ratio is less than 15, and the rent when it is above 20. Markets with a high price / rent ratio usually do not offer such a good investment opportunity.
6. Gross rental yield
The gross rental income for an individual property can be found by dividing the resulting annual rent by the total property value and then multiplying that number by 100 to get the percentage. The total value of the property includes the purchase price , all closing and renovation costs.
7. Capitalization rate
A more valuable number than gross rental income is the capitalization rate , also known as the maximum rate or net rental income, because this figure includes real estate operating expenses . This can be calculated by starting with the annual rent and subtracting the annual expenses, then dividing that number by the total property value and multiplying that number by 100 to get the percentage. Common rental costs for real estate include renovation costs, taxes, landlord insurance , job vacancy costs, and agency fees.
8. Cash flow
If you can cover the cash flow , which most often occurs when an investor borrows too much to buy a property, it can lead to loan defaults unless you can sell the property for a profit.
The essence
Once you've done all of these calculations, you can make an informed decision about whether a particular property is going to be a valuable investment or a lemon.
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