Evaluating a real estate investment
Evaluating a real estate is somewhat similar to investing in stocks. You must know how to value them and make educated guess about the income they shall generate by the means of rental gains, property appreciation or both in order to gain profit. Accurate evaluation can help investors make informed decisions, when it comes to buy and sell a property.
There are couple of techniques that can prove quiet handy foe evaluation.
- Mortgage payment: For a standard owner-occupied home, lenders typically prefer a total debt-to-income ratio of 36%, but some will go up to 45% depending on other qualifying factors such as your credit score and cash reserves. This ratio compares your total gross monthly income with your monthly debt payment obligations.
- Down payment requirements: While owner-occupied properties can be financed with a mortgage and as little as 3.5% down for an FHA loan, investor mortgages typically require a down payment of 20 to 25% or sometimes as much as 40%
- Rental income: While you may assume that, since your tenant's rent payments will (hopefully) cover your mortgage, you should not need extra income to qualify for the home loan. However, in order for the rent to be considered income, you must have a two-year history of managing investment properties
- Price to rent ratio: The price-to-rent ratio is a calculation that compares median home prices and median rents in a particular market. Simply divide the median house price by the median annual rent to generate a ratio
- Gross rental yield: The gross rental yield for an individual property can be found by dividing the annual rent collected by the total property cost, then multiplying that number by 100 to get the percentage. The total property cost includes the purchase price, all closing costs and renovation costs.
- Capitalization rate: the capitalization rate enables you to evaluate and compare properties without factoring in financing. This can be calculated by starting with the annual rent and subtracting annual expenses, then dividing that number by the total property cost and multiplying the resulting number by 100 for the percentage.
- Cash flow: If you can cover the mortgage principal, interest, taxes and insurance with the monthly rent, you are in good shape as a landlord. Just make sure you have cash reserves in hand to cover that payment in case you have a vacancy or need to cover unexpected maintenance costs.
Always ensure you make money when you buy. When you buy a house to live in, there are a lot of factors that go into it. Do you like the neighbour’s? Are the schools good? How long is the commute? How will your furniture look in the house? Can you see yourself growing old there? These and a dozen other issues come into play. But when you buy an investment property the purchase is all about the money. What kind of a return will you get on your investment? You do not care about the colour of the carpet, only about how soon until you will have to replace it. You should not care about the school district or the distance from the hospital, only about what you can get for rent. This is an important distinction one need to determine before investing or buy a home/property. While one might find calculating these and making an insight from it. Hopefully, there are some prop-tech companies who look for these things for you. they will provide a systematic approach to real estate investment so that you could maximize your investment yield. Also, they will provide you the required analytics along with required KPI’s such that you could take informed decisions before purchasing a property. They specialise in investment planning, investment execution, investment research and investment realization. Not only this, they also reduce paper work and make transactions quicker and more efficient. With the use of information technology (IT) they help you buy or sell the ideal property and sometimes even with managing properties. It’s a worthy giving them a thought.