How to Calculate the Most Important Numbers in Investment Real Estate
Let’s get right into it.
Down Payment
What Is It? A down payment is the amount of money you pay after closing on your home, generally a percentage of the total price, which varies depending on several factors (e.g., your location, the type of loan, your financial position, etc.). Figuring out your down payment is necessary so that you can budget as you purchase new properties.
How to Calculate: Purchase Price x Down Payment Percentage = Down Payment
Mortgage Payment
What Is It? Your mortgage payment is the total you pay each month for the home you purchased. It generally includes the loan interest, loan principal, taxes, and home or rental property insurance. Knowing your mortgage payment amount is important so that you can set the right price for your rental property each month and still make an ROI, as well as put necessary funds aside for property maintenance and other things that come up.
How to Calculate: Principal Amount [ Interest Rate(1 + Interest Rate)# of Payments ] / [ (1 + Interest Rate)# of Payments − 1] = Mortgage Payment
HOA Costs
What Is It? An HOA, or homeowners association, provides rules and regulations for condos, subdivisions, co-ops, and related properties. HOAs require owners to pay fees to help maintain the property, parking area, and community spaces. It is important to know the HOA fees so that you can plan accordingly.
How to Calculate: (Total Expenses + Total Reserve Contributions + Additional Income) / Number of Homes in the Association = HOA Costs Per Owner
The 1% Rule
What Is It? The 1% rule states that your rental property should make a return of 1% (at minimum) of the total amount you purchase the property for. In other words, let’s say that you buy a property for $100,000. The goal is to generate a rental income of $1,000. Abiding by this rule will help ensure you’re generating a high enough income on your rental property.
How to Calculate: Purchase Price / 100 = 1% of the Property Value
Gross Rental Yield
What Is It? Gross rental yield shows the return on your real estate investment before taxes and other expenses are taken out. This is an important calculation to know because it lets you know how much money your property can generate.
How to Calculate: (Annual Rental Income / Property Value) x 100 = Gross Rental Yield
Cash Flow
What Is It? Cash flow is the amount of money you’re bringing in from your real estate investment after expenses. This tells you how much money you can budget safely and set aside for future investments.
How to Calculate: Net Income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure = Cash Flow
Capitalization Rate
What Is It? The capitalization rate, also called cap rate, shows how much you’re making on your property from year to year. This is important because it shows the rate of return on various types of properties.
How to Calculate: Net Operating Income / Purchase Price = Capitalization Rate
The P/E Ratio
What Is It? The P/E ratio, or price-per-earnings ratio, tells you how your share price operates in conjunction with the earnings per share. It is important because it shows how much someone would be willing to pay per share. Generally, P/E ratios are 20-25. Lower is better when it concerns P/E ratios.
How to Calculate: Market Price Per Share / Earnings Per Share = P/E
Conclusion
If you have an investment property, we hope this guide on real estate numbers helped provide clarity on what is important to know. Remember: if you don’t want to worry about the headache or calculations, one of the best things you can do is work with a property management company. Evergreen Property Management is a trusted Portland manager in Portland that strives to provide owners with the best possible guidance on how to make the most from your investments.
Ready to work together? Contact Evergreen Property Management today! We’re here for you.