If you’re on a property search because you’re looking to invest or looking to move, there are so many things to consider like location, rehab, storage space, etc.
But there are certain figures you should be aware of that are sometimes overlooked. Having an idea of what are the important values and what values you should aim for, can help you narrow down your search. It may not help your heart when you’re in love with a property, but it will definitely help your brain make an intelligent property assessment and decision.
1. Number of days on the market
This number helps estimate if a property is priced too high or has too many issues. Good properties in the right neighborhoods with correct prices usually spend the least amount of days on the market. So if the number of days seems too long, find out why. If you are looking to flip the property, maybe this won’t be an issue for you.
2. Your monthly payment
The home’s mortgage, tax, and insurance costs are important to know because they determine if you can afford the property or not. If you are buying the property for an investment, this figure tells you what your minimum rental incomeshould be. Does this number give you a positive cash flow? In addition, you need to know how much your down payment will be. Buyers who want to live in the property have the option of a applying for a FHA loan and can put down as little 3.5% while investors are usually required to put down 20-25%; although sometimes are required to put as much as 40%.
3. Your Debt to Income Ratio
A standard owner-occupied home (buying a house to live in) should not have a debt-to-income ratio of more than 36%, although some lenders go up to 45% depending on things like credit score. If you are applying for a loan for an investment property, the maximum debt-to-income ratio is 45%. Before looking for a property, know what ratio you need to qualify for financing.
4. Number of offers
You should talk to your agent early on in the search process about the price range competition in the neighborhood. Ask about specifically about the properties that are similar in type to what you are looking for. Hence, if you are looking for a condominium, how much are they selling for? What is the selling price compared to the listing price? This will indicate how assertive you need to be to obtain a house. However, being assertive does not mean going above your budget.
5. Capitalization (Cap) Rate
This number is very important because it is an estimate of your potential return. The capitalization rate is the rate of return based on a real estate investment property income.
[(Annual Rent – Annual Expenses)/Total Property Cost] X 100
The number you get from this formula is a percentage – indicating how much of the profit you expecting earning per year. Don’t forget the total property cost includes repairs, taxes, insurance, vacancies, agent feesm, etc. You can use an investment property calculator to simplify this process. A “good” cap rate depends on the area and property you are looking for.
6. Price to Income Ratio
This is the comparison of a median household price to the median household income. It is important to know this ratio in the area you’re investing so you can compare your own budget to your expected income. If you are investing, you should also know this number because it tells you what kind of rent you can expect and if it can meet the one percent rule. For example, you are purchasing an investment property for $400,000 in an area with an average income of $60,000, making the ratio 6.6. If the area you are investing in has a ratio of 2.5, then your comparison has a big difference and could mean you will not get a high or a quick ROI. If you are buying a house to live in, divide the price of the property by your annual salary, does it come close to your area’s ratio?
7. Price to Rent Ratio
This ratio is the median home price to median rent in a market. To get this ratio, divide the median house price by the median annual rent. Generally, consumers should consider purchasing the property when the ratio is under 15 and rent the property when the ratio is above 20.For example, if the median house price is $400,000 and the median annual rent is $30,000, the ratio is 13.3 – so you should probably buy the property because you can more quickly pay it off. Investors should watch out for this numbers because a high ratio can make the investment opportunity difficult.
Whether you are buying or investing and looking to obtain another property of a similar style later on, know what your chances are of finding a similar property.
Knowing what these values mean beforehand can be really helpful when it comes time to ask questions. Having an idea of what values to aim for can really disciple your search and decisions which means making wise decisions.
Do you have certain figures you look for when buying a property? What are some things you wish you knew before buying a property? What are deal-breakers for you?