Real Estate Math - Do You Know These easy Formulas?

Homes For Rent In Shreveport La - Real Estate Math - Do You Know These easy Formulas?

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How much real estate math do you need to know if you are investing in real estate? There are computers and calculators for calculating interest rates or amortizing loans. What you need to know is a few easy formulas for determining if a property is a good investment or not.

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Homes For Rent In Shreveport La

The Real Estate Math You Don't Need

The gross rent multiplier is one recipe you don't need. I bring it up because people are sometimes still using it, and there are great ways to estimation value. A gross rent multiplier is a crude way to put a value on a property. You determine that properties are worth 10 times each year rent or less, for example, and naturally multiply the gross each year rent a building collects by ten to get your value.

There are clear problems with this formula. You need to enduringly turn it to reflect interest rates, because a property might be profitable at 12 times rent when interest rates are low, but a money loser at eight times rent if the financing is expensive. Also, there are just plain different expenses for different properties, especially when some contain utilities in the rent, for example. Gross rent doesn't say much about the factor that makes a property valuable: the net income.

Real Estate Math You Need

Rental properties are bought for the income they produce, so this is what your real estate valuation should be based on. That is why your real estate math schooling needs to start with the how to use a capitalization rate, or "cap rate" to determine value. A cap rate is the rate of return improbable by investors in a given area, or the rate of return on a property at a given price.

An example might make this clear. Take the gross income of a property and subtract all expenses, but not the loan payments. If the gross income is ,000 per year, and the expenses are ,000, you have net income before debt-service of ,000. Now, to arrive at an estimation of value, you naturally apply the capitalization rate to this figure.

If the normal capitalization rate is .10 (ask a real estate professional what is normal in your area), meaning investors expect a 10% return on the value of their investment, you would divide the net income of ,000 by .10. You get 0,000 - the estimated value of the building. If the coarse rate is .08, meaning investors in the area expect only an 8% return, the value would be 0,000.

Simple Real Estate Math

Estimated value equals net income before debt-service divided by cap rate - this undoubtedly is easy real estate math, but the tough part is getting precise income figures. Is the seeder is showing you All the normal expenses, and not exaggerating income? If he stopped repairing things for a year, and is showing "projected" rents, instead of actual rents collected, the income form could be ,000 too high. That would mean you would estimation the value at 7,000 more (.08 cap rate).

Besides verifying the figures, smart investors sometimes isolate out income from vending machines and laundry machines. Suppose these sources furnish ,000 of the income. That would add ,000 to the appraised value (.08 cap rate). Instead, you can do the estimation without this income included, then add back the exchange cost of the machines (probably much less than ,000).

No real estate recipe is perfect, and all are only as good as the figures you plug into them. Used carefully, though, real estate estimation using capitalization rates is the most precise recipe for estimating the value of income properties. For putting a value on a singular house home, you need another approach. Yes this means more real estate math to learn, but we'll save that for another time.

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