So you’re thinking of getting into real estate. What do you need to know? Some might be taken back with the amount of experience they think they need prior to investing. While educating yourself about real estate is the most crucial step before investing – you don’t need experience in finance, contracting, landlording, or any other field that intertwines with real estate investing.
Part of that education is learning the numbers and metrics you’ll be monitoring to make sure your investment property is a success. While you can use tools like a rental property calculator to calculate most of these numbers for you, it’s good to know what they are and their significance.
Let’s start with the numbers that an investor or homebuyer is first exposed to:
1. The Listing Price
Duh. The first thing you’ll learn about a property is its listing price. It’s probably the first thing you should ask about. Why? A smart investor using a mortgage does two things when looking for a property 1) gets pre-approved for a loan from a bank prior to looking 2) sticks with their budget based on the pre-approval.
There are some other expenses that have to be paid in order to acquire the property besides the listing price, like closing costs and a home inspection. If there are rental renovations needed, don’t forget those costs as well.
2. Your Mortgage Payment
The listing price leads to your monthly mortgage payment. Your payment will depend on how you choose to finance the rental property – your mortgage plan and interest rate. But your monthly payment doesn’t stop at the mortgage payment. These are additional monthly costs:
- property tax
There are additional costs that might apply like using property management or paying an homeowner’s association or condo fees.
These costs can be overwhelming, but these additional expenses can be entered into an interactive rental property calculator if used.
At this point, you might be overwhelmed. You’re only on number two of this list and you’re already spending so much money! But no need to panic . . . that’s why positive cash flow is so important and that’s what brings us to our next number . . .
3. Cash Flow
The main objective of real estate investing is to make money every month. Or at least, that’s what we think should be your objective – some people only invest for appreciation. But positive cash-flow = profiting every month, which means two things 1) making a profit from the get-go and 2) earning money after paying all those expenses that are listed above.
Feel better? 🙂
So what is positive cash-flow and how do we make sure we to achieve that?
Cash Flow = Monthly Income – Monthly Expenses
It’s petty simple. By doing your homework and knowing your expected expenses and adding a maintenance and vacancy provision, you can set the rent high enough to cover these costs and generate a profit.
This is your monthly income – if you want to know your yearly income, that’s what we call, net operating income (NOI) or net cash flow.
If you have an idea about your monthly and annual income, now you want to know your overall returns on the investments. There are a couple of metrics that can you help you do that.
4. Cash on Cash Return
Not all investors use this number but it’s important because it calculates your returns based on the amount of money put into the investment. To get this number:
Cash on Cash Return = (Net Operating Income/Total Cash Investment) X 100
A cash on cash return of 10% or in the 8-12% range is considered a good cash on cash return.
Many investors are familiar with cap rate, which is also a good metric to use but does not factor in how the property is finance. So, if you’re looking at properties and want to get a quick idea of their returns without having decided on financing, this is the number to consider:
Cap Rate = (Net Operating Income/Price) X 100
A cash on cash return of 10% or in the 8-12% range is considered a good cap rate.
Cash on cash return is an important figure and should be included in the investment property analysis. In addition, a neighborhood’s cash on cash return is also important because it helps lead you to a lucrative area. Mashvisor’s rental property calculator gives you a neighborhood’s average cash on cash return automatically.
5. Return On Investment
This might be the number you’ve been wondering about. This is the number that takes everything into consideration. What is everything? Cash flow and equity. Think about it as your visible and invisible gain: the visible gain is the cash flow you receive every month. The invisible gain is the step you take every month, bringing you closer to owning the property (which is paying the principal payment). How do we calculate this?
(Cash Flow + Principal Payment) X 12 Months = Annual Return
ROI = (Annual Return/Investment Costs) X 100
*Take a look at the first number on this list to get a list of investment costs.
6. Your Agent’s Phone Number
This is an important number to know! While it’s wise to consult a rental property calculator first, an agent will provide you with additional information about an area and guide you. They’ll also help you when it comes to negotiating. After getting an idea about an area’s and property’s projected numbers, ask an agent for inside information and tips on getting the best deal.
Now you know the numbers – what they are, how to calculate them, and why they’re important. Using a rental property calculator is becoming a trend and eliminating the need for spreadsheets, but what’s the point of using a calculator if you don’t know what you’re calculating?
Use Mashvisor to get a neighborhood and property’s projected rental income, cash on cash return, and cap rate.