Real Estate Calculations for Investors

There is more to understanding investment real estate than the home itself. There are decisions that will need to be made before you purchase the property. You will need to know certain calculations so that you can make the right decision. One decision you will need to make is, are you holding the property to be rented out or are you going to rehab it and flip the property.

Remember, your profit is usually determined when you buy the home, not when it sells. This means if you buy the property for the right price, you will have the profit margins you are wanting.

Using a Realtor, you can get help with some of the information you will need to complete the formulas or double check the numbers. Websites like Zillow and other public sites that offer FREE VALUATION can provide inaccurate information.

Gross Scheduled Income

This real estate formula lets you know how much income your property will generate if all units within it are rented and if there are no defaults in rent payments. This can be a useful measure to compare with your actual income.

Talk with your Realtor and get some rent comps for the area. Many investors guess the rents or place what they think they will be asking. Rental comps are as important as sales comps. You want to be realistic in your calculations. If you get more than what you expected…GREAT!

Gross Scheduled Income = Rental Income + Lost Rental Income from Vacant Units

Gross Operating Income

This figure reflects the gross operating income in addition to all other sources of income from your rental property. This can include revenue from parking spaces, laundry, public vending machines, or others.

Gross Operating Income = (GSI – Lost Rental Income from Vacant Units) + Other Income

Net Operating Income

To use the net operating income formula, you first need to figure out your gross operating income. Once you have that figure, you subtract your operating expenses- things like insurance and maintenance costs. You should note, however, that things like investment property depreciation and interest payments do not factor into operating costs. 

Net Operating Income = Gross Operating Income – Total Operating Expenses

Capitalization Rate

The cap rate is one of the most important real estate formulas. The cap rate formula compares an investment property’s net operating income with its market value, allowing investors to quickly compare properties to see which one is most worth it.

Cap Rate = Net Operating Income / Market Value of Property

Cash on Cash Return

Figuring out your cash on cash return is crucial in real estate investing. It is a widely popular real estate formula since it allows investors to compare investments and evaluate the most profitable one based on the terms of financing. A spreadsheet is a good way to see the side by side comparison between properties that are similar. By setting up the spreadsheet with formulas, you can quick input the basic numbers and see which one is the best property for your investment.

To use the cash on cash return formula, you simply divide your net operating income by your total cash investment. Typically, your total cash investment will include the down payment, closing costs, renovation costs, and any other upfront fees you paid to acquire the investment property.

Cash on Cash Return = Net Operating Income / Total Cash Investment

Equity Build-Up Rate

Smart real estate investments do not always come in the form of immediate income. Some properties are great investments due to their potential to build equity, therefore becoming more valuable assets in the future. This simple real estate formula can help in measuring these gains.

Consulting with your Realtor is also a good way to see how quickly an area is growing in value.

Equity Build-Up Rate = Mortgage Principal Paid (Year 1) / Initial Cash Invested (Year 1)

Price to Rent Ratio 

This figure shows you how much rent you will be receiving, versus the price at which your property was purchased. This can be useful when comparing residential real estate investments. Like other calculations, a spreadsheet with formulas can help make quicker decisions.

Price to Rent Ratio = Purchase Price of Property / Annual Rental Revenue

Price Per Square Foot

Along the same lines, the price per square foot real estate formula can be useful when comparing investments. Savvy investors can use this calculation to evaluate if a rental property is overpriced before it is purchased. Your Realtor can help you evaluate this more in depth by pulling both rental and sales comps, which list out the price per square foot (as-is, not post-rehab).

Price Per Square Foot = Market Value of Property / Property Square Footage

Return on Investment

The return on investment formula allows you to see how much of your initial investment you can recoup annually.

Return on Investment = Annual Returns / Cost of Investment

Cash Flow From Operations

Successful real estate investments will involve more money coming in than going out. You need to subtract your capital expenditures (roughly defined as large expenses that do not reoccur) from your net operating income to figure out your cash flow from operations.

Cash Flow From Operations = Net Operating Income – Capital Expenditures

Cash Flow After Financing

Considering that most real estate investors have borrowed money in order to make their investment, this cash flow formula can provide a better idea of what your cash flow is like.

Cash Flow After Financing = Cash Flow From Operations – Financing Costs

Occupancy Rate

This figure reflects the time that an investment property is rented out over a period. Your occupancy rate is one of the most important indicators of your success, and a low occupancy rate can let you know that action is needed from your end.

Low occupancy can occur when properties are in need of repair. People tend to look for a replacement place to live if a landlord is not keeping the place livable or did not complete some repairs required previously. Landlords can “promise” to fix things to get people to move it, in turn causing them to move out as fast.

Occupancy Rate = Number of Days Occupied / Total Number of Days in One Year

Break Even Ratio

This figure is often used to evaluate risk when making a real estate investment. Too high of a figure when using this real estate formula can indicate that it will be an uphill battle to break even with an investment property and recoup debts.

Break Even Ratio = (Debt Servicing Costs + Operating Expenses) / Gross Operating Income

Gross Rent Multiplier

The gross rent multiplier real estate formula allows investors to figure out the market value of a rental property. This is especially useful when selling a rental property, as it allows you to set the right price the first time.

You will want to compare notes with a Realtor. This calculation can help set the value based on the numbers, but it is always good to have a second pair of eyes.

Gross Rent Multiplier = Market Value / Gross Scheduled Income

Debt Service Coverage Ratio

This real estate formula can be used to figure out the current cash flow you have available to recoup the debt which financed your investment.

Debt Service Coverage Ratio = Net Operating Income – Annual Debt Service

If you have any questions about real estate or would like to buy or sell a home, Investment property, or commercial property in Michigan (Ohio and Florida in 2021), please e-mail us at info@mittenrealtygroup.com or call 248-294-7850.

Thank you,

Scott Fader and Gary Brincat
Mitten Realty Group, LLC

Mitten Realty Group is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

What is a Real Estate Appraisal? And more….

 

Real estate appraisal, property valuation or land valuation is the process of developing an opinion of value, for real property (usually market value). Real estate transactions often require appraisals because they occur infrequently and every property is unique (especially their condition, a key factor in valuation), unlike corporate stocks, which are traded daily and are identical. The location also plays a key role in valuation. However, since property cannot change location, it is often the upgrades or improvements to the home that can change its value. Appraisal reports form the basis for mortgage loans, settling estates and divorces, taxation, and so on. Sometimes an appraisal report is used to establish a sale price for a property.

If you have bought or sold real estate – your own personal residence, investment, or commercial property, you have probably dealt with the appraisal process. Besides the inspection, it is the part of the transaction that keeps you biting your nails. As the seller or selling agent, even with the most up to date information, appraisals can come in with unexpected values.

Sellers and listing agents should do their homework and have comps ready in case the appraisal comes back with a number that is lower than the list or sales price. You can submit these comps to the appraisal company to fight the appraisal. The more homework you must share, the better the chances you have to get them to adjust price. Although in the years I have been doing real estate, I have a better chance at winning the lottery, than getting them to adjust their report.

Buyers cannot chose the appraisal company or the appraiser they use (I will not say that this is 100% of the time, but in most cases where a loan is involved, the buyer will be hands off and should remain hands off). Buyers and their agents should also do their homework to make sure the offer they are submitting matches the value of homes in the area. Renegotiating the deal after the appraisal can be a struggle once the seller has a value from the offer in their head. Even through it was offered, the bank will not accept something lower and most of the time the buyer is not willing to come to the table with more money than the home is currently worth.

An appraisal is a safety net for the bank and the buyer. The bank needs to protect its loan with a piece of real estate at a specific loan to value.

If you have any questions about real estate or would like to buy or sell a home, Investment property, or commercial property in  Michigan, please e-mail us at info@mittenrealtygroup.com or call 248-294-7850.

Thank you,

Scott Fader and Gary Brincat
Mitten Realty Group, LLC

Mitten Realty Group is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

 

Establishing your Home’s Value

As a For Sale by Owner, how are you establishing the sale price of your home? Are you using Zillow? Listening to Uncle Joe? What process are you using to determine the value your home?

Establishing the sales price of your home is especially important to getting your home sold. There are many FREE online tools and websites that offer “guestimates” on value, but many times they are not correct for “your” specific market. Your home cannot be randomly compared to other homes sold within a certain area. There are many factors that play into establishing home values that cannot be grouped together and averaged.

Realtors and appraisers use methodical processes and neighborhood specific data to come to a listing price valuation (real estate professional) or lending/Mortgage value (appraiser). Both Realtors and appraisers have access to up to date, active, pending, and closed data that can help them select  comparable homes in the area and analyze the differences between them to come up with an accurate listing price.

In today’s market, buyers have full access to the homes for sale, and over pricing your home could lead to no or low number of showings, extended days on market, and continued holding costs.  High Days on market can then produce offers that are “low-balled” since they see that you have been on the market for a while. Yes, days on market can negatively affect the value of the offers, Realtors know high days on market is an indication to come in low.

So how do you get a good listing price for your home as a For Sale by Owner? I would suggest you call a Realtor or Broker. Pay them to run a report for you or do a full Comparative Market Analysis or Broker Price Opinion (Realtors do not do “Appraisals”). This could run you as little as $100 to as much as $300, but it is worth it. You are saving about 3% by not having a listing agent, so pay a little to help make sure you have the right price point for your home in the market you are in.

Also, just because you recently updated your home, does not mean the full value of the improvements  will be returned in actual home value, many upgrades you perform on a home increase the desirability, but not the value. Desirability is not a bad thing, it may differentiate you from the home down the street, which is also for sale.  This will become very apparent if you sell to a buyer who is getting a mortgage, the mortgage companies’ appraiser (paid for by the buyer) is representing the bank, not you or even the buyer.  Appraisals are sometimes waived if the buyer is a strong buyer (20% or more down) or the if the buyer is a cash buyer, there is no appraisal at all.

For Sale by Owner can be a formidable task and there are many more moving pieces than expected. It can be frustrating and exciting at the same time. You are trying to save YOUR hard-earned Homes Equity and that is GREAT, but do not hesitate to use a Proven Professional when needed to help or to take over the sale.

Be especially careful about hiring Family members or friends to sell your home, your home is one of your largest assets, go with a proven professional not a part time agent.

If you have any questions about real estate or would like to buy or sell a home, Investment property, or commercial property in  Michigan, please e-mail us at info@mittenrealtygroup.com or call 248-294-7850.

Thank you,

Scott Fader and Gary Brincat
Mitten Realty Group, LLC

Mitten Realty Group is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.