Don’t Take A Hunch – Crunch!

For today’s article, I would like to proportion with everyone my top 10 general calculations to perform before investing in any real estate:

Loan-To-Value (LTV):

Unless you have enough money to pay off the complete character, you’ll have to consider taking out a loan for your real estate investment. consequently, one of the more basic ratios to consider is the LTV because it’ll affect the total amount you’ll pay to borrow the funds. In general, high LTV values are classified as “high-risk” and borrowers would typically either be charged more, or be required to buy mortgage insurance, consequently increasing your overall operating expenses.

Formula: Loan Amount x 100 / Market Value = LTV

Net Operating Income (NOI):

Any successful real estate investor would tell you the importance of calculating NOI. Not only does it take into account the similarities annual gross income less vacancies but also bad debt and total operating expenses. For those unaware, gross income includes any income associated with the character (e.g. rental, parking, laundry); operating expenses pertains to all costs incurred during the operating and maintenance of the character (e.g. repairs, insurance, utilities, character tax, management, etc).

Formula: Gross Income – Vacancy, Debt, Total Operating Expenses = NOI

Capitalization Rate (CR):

To determine the value of income producing similarities, many investors calculate the CR as a gauge to calculate the buy price for different types of income producing similarities. In general, the higher the selling price, the lower the cap rate and the lower the selling price, the higher the cap rate.

As an investor, you would want your cap rate (%) as high as possible.

Formula: Net Operating Income / Sales Price (Value) = CR

Gross Rent Multiplier (GRM):

One of the easiest ways to determine a rough calculate of a character’s value is with the use of the GRM which only requires two pieces of information – the sales price and the total amount of gross rent possible. You could calculate the GRM on a monthly basis, or yearly, and it’ll give you a good gauge on how much cash flow the character is capable of producing.

Formula: buy Price / Annual Gross Rent = GRM

Debt-Cover Ratio (DCR):

The DCR is another vital ratio used to measure a character’s ability to pay back its mortgage and other operating expenses. From an investor’s perspective, the larger the DCR value, the better and a DCR ratio of 1 equates to “break-already.” Typically, many lenders and edges require a DCR value of 1.1 – 1.3 prior to approving loans.

Formula: NOI / Debt Service (Total Principal & Interest yearly) = DCR

The BER is used to compute the ratio between a character’s cash out flow and rental income to determine what percentage is outgoing compared to income. Typically, many lenders and investors look for a BER value of <85%. Reason being is that they want some kind of assurance should rents decline ~15% before the character breaks already.

Formula: Debt Servicing + Annual Operating Expenses / Gross Operating Income = BER

Return on Investment (ROI):

To be a successful investor, you must determine your ROI to ensure that you receive profits from your investment(s) after deducting all associated costs and expenses. Not only would the ROI help to estimate the profitability of an investment but also its efficiency and effectiveness in relation to other similarities or investments.

Formula: Gain from investment – Cost of Investment / Cost of Investment = ROI

Cash-On-Cash Return (CCR):

The CCR is a percentage measuring the return on the cash invested in a rental character.

Formula: Cash Flow Before-Taxes / Cash Invested x 100 = CCR

Appreciation (A):

Of course, not all real estate investments will be short-term flips. There are some similarities that you’ll want to keep up onto for the long-term in an effort to take advantage of appreciation because you feel that these similarities will be worth much more in the future. instead of getting moment gratification by a quick sale, you could keep the character and little by little make improvements in an effort to increase rent. Remember, many investors would gladly pay more for a character with a high ROI and appreciation.

Formula: Future Resale Price – Original Sales Price = A

Depreciation (D):

Depreciation is another important consideration when investing in real estate. To calculate basic depreciation, investors must know the initial cost of the asset and it’s salvage value, including estimated “useful life.”

Formula: Cost – Salvage Value / Estimated Useful Life = D

To illustrate, let’s say that an investor purchased a character for \$100,000 and it’s useful life was determined to be 10 years, then the character depreciates in value by \$10,000 yearly.

Henry Ford once said that “the best we can do is size up the chances, calculate the risks involved, calculate our ability to deal with them, and then make our plans with confidence.” By using the 10 calculations mentioned above, you could crunch the numbers to eliminate the guess work with any real estate investment and approach each deal with confidence!

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