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How To Pick A Great Real Estate Investment Property
Real estate can be an excellent investment – if you know what you're doing.
But how do you know if you're getting a good deal? Will you make money on your investment? Will your estimate for expenses and income work out?
This real estate calculator will help you answer these questions… and more.
The reality is your investment property profits are driven by the math behind the deal, which can be complicated. There are a lot of numbers and ratios to consider. This investment property calculator makes the math easy so you can focus on negotiating and operating your property portfolio, rather than analyzing it.
Below is more information about how real estate investment works so you can maximize your results.
The Goal Of Investment Properties
When you start acquiring properties for investment purposes, your ultimate goalis to earn a profit – both through cash flow and appreciation. These are the two main components of your return on investment equation (tax considerations being a third).
The number to focus on is positive cash flow because it makes investment property ownership a joy to get paid at the same time you grow equity; whereas, it is a pain when you have to feed your real estate due to negative cash flow.
Ultimately, your ROI equation will be dominated by the gain or loss from the changing value of your real estate, but your peace of mind while owning the real estate will be determined by whether it is positive or negative cash flow.
Additionally, you should try to pick investment properties that don't require much maintenance. The reason is because you have only two resources – money and time – and the only one that is truly limited is time. You can't make more of it.
What that means is the last thing you want is to spend all your valuable time improving and maintaining properties. Even if the property doesn't require much money, remember: time is ultimately more valuable because it is limited – you can't make more of it.
Related: Why you need a wealth plan, not an investment plan.
In summary, always keep in mind the reality of ownership before buying. There is much more to real estate than just numbers. For example, positive cash flow gives you an infinite holding period and makes ownership a joy, but that number will be overshadowed by gain or loss in market value dominating your return on investment equation even thought it has little effect on how you feel about ownership month to month.
Similarly, maintenance problems might not seem a problem when you are excited to gain control over a property, but the ongoing headaches can severely impact how you feel about ownership.
How ToMake Money From Investing In Real Estate
So how do you build wealth through real estate investing?
Let's look closer at the various sources of return that will be revealed when working with this real estate calculator.
- Real estate investments generate income through rent – Some people invest in properties such as buildings, commercial complexes, or houses for the purpose of renting themout. Income generating properties includewarehouse units, apartments, office buildings, rental houses and more.
- Real estate canappreciatequickly– Growth in valuation is usually the biggest factor impacting your investment return equation. If the properties around your area arescarce or the area experiences rapid economic growth then you can expect real property values to increase. Conduct careful researchand know the development plans in your city before investing.
- Make money from business operations – Engage in business services that could generate additional income, like setting up a vending machine, offering laundry, or food-catering services in apartments. If your property includes vacant land consider adding storage units for additional rental revenue.
How To Buy Real Estate Properties
There are several ways to finance your real estate purchase. You can take loans against your existing property or take a regular mortgage loan.
Related: How to take back control of your portfolio
For those who are already experts in real estate investing, theycan consider hard money loans. Hard money loans areeasier to get because they are not based on the credit worthiness of the borrower. Instead, they are based on thevalue of the property. But beware – hard money loans can be expensive turning a marginal property into a loser.
Begin your investment process by considering the following steps:
- Start saving for the down payment –Review your budget and check which expenses you can cut to increase your savings.
- Set a goal and start with small investments – It is important toset a goal for yourself in writing stating when you will be able to buy your first investment. Be specific using an exact date.
- Control Risk – Complete a thorough due diligence before closing escrow. Make sure to carry proper insurance and consider purchasing within a legal entity other than yourself to control lawsuit risk. Manage the property tightly with careful control over cash flows and investigate any irregularities immediately. It is amazing how much money can be saved in expenses with proper care and a little creativity.
- Get some help – There are lots of self-help books available. But it is also important that you consult the experts in this field. Learn from the mistakes of those who are one or two steps ahead of you.
Final Thoughts
Investing in real estateis not for everyone. It is part business and part investment.
Your investment return is a function of buying it right and financing it right. Your business return is a function of managing it right.
Real estate investing is not a get-rich-quick schemeand it can take decades before you see results. Educate yourself, invest wisely, and design a strategic plan of action that includes real estate as part of your overall wealth plan here.
Related: A better investment strategy than buy and hold
Real Estate Calculator Terms &Definitions
- Real Estate – Property consisting of land or buildings.
- Purchase Price – The price of the real property.
- Down Payment –An initial payment made when something is bought on credit.
- Loan Term – The period you need to pay the loan.
- Interest Rate –The proportion of a loan that is charged as interest to the borrower, usually expressed as an annual percentage of the loan outstanding.
- P&I – Principal and interest.
- Principal – Denoting an original sum invested or lent.
- Interest – Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.
- Closing Costs – Fees paid at the closing of a real estate transaction.
- Vacancy Rate –A value calculated as the percentage of all available units in a rental property that are vacant or unoccupied at a particular time.
- Gross Scheduled Income –The maximum possible annual income generated by rent collections.
- Other Income – All the other income generated from the property.
- Property Management Expense – The total expenses for maintaining the property.
- Capitalization Rate –The ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset); or, its current market value.
- Cash on Cash –The return on investment. It is equal to the Before Tax Cash Flow (BTCF) divided by the sum of all out-of-pocket acquisition costs (down payment, closing costs, etc.).
- Gross Rent Multiplier – Purchase price divided by theGross Scheduled Income (GSI). The lower the number the better.
- Net Income Multiplier – Purchase price divided by the Net Operating Income (NOI). The lower thenumber the better.
- Debt Coverage Ratio –The Net Operating Income (NOI) divided by the Annual Debt Service. The higher the numberthe better.
- Expense Ratio –Total Operating Expense divided by Gross Operating Income (GOI), expressed as a percentage. A percentage below 35 is considered good.
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Investment Losses Suck!
Here’s how to make more by losing less…
If you're looking for an investment strategy that goes beyond "buy and hold" while controlling risk and requiring as little as 30 minutes a month to manage, this is the answer. It’s so good I wish I had built it myself. Take back control of your portfolio and start getting results today.
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As a real estate investment enthusiast with considerable expertise, I can confidently delve into the concepts mentioned in the article about picking a great real estate investment property and using a real estate calculator. My extensive knowledge in real estate investment allows me to provide a comprehensive overview of the key elements discussed in the article.
Real Estate Investment Goals: The primary objective of investing in real estate is to earn a profit, encompassing both cash flow and appreciation. Positive cash flow is crucial for a joyful ownership experience, as it allows you to get paid while growing equity. Additionally, selecting properties that require minimal maintenance is advised, considering the limited resources of money and, more importantly, time.
Sources of Return in Real Estate Investments:
- Rental Income: Properties such as buildings, commercial complexes, and houses can generate income through rent.
- Appreciation: Real property values can increase with factors like scarcity in the area or rapid economic growth.
- Business Operations: Engaging in additional business services within the property, like vending machines or storage units, can generate extra income.
How to Buy Real Estate Properties: Financing options include loans against existing properties, regular mortgage loans, and for experts, hard money loans based on property value rather than borrower creditworthiness. Key steps in the investment process involve saving for the down payment, setting specific investment goals, thorough due diligence, risk management, and seeking guidance from experts.
Real Estate Calculator Terms & Definitions: Understanding the terminology associated with real estate calculations is essential. Some key terms include:
- Purchase Price: The cost of the real property.
- Loan Term: The duration for repaying the loan.
- Interest Rate: The annual percentage charged as interest.
- P&I (Principal and Interest): Components of loan payments.
- Closing Costs: Fees paid at the closing of a real estate transaction.
- Vacancy Rate: Percentage of vacant units in a rental property.
- Capitalization Rate: Ratio between net operating income and asset cost.
- Cash on Cash: Return on investment based on before-tax cash flow.
- Gross Rent Multiplier: Purchase price divided by Gross Scheduled Income.
- Debt Coverage Ratio: Net Operating Income divided by Annual Debt Service.
- Expense Ratio: Total Operating Expense divided by Gross Operating Income.
This comprehensive understanding of real estate concepts empowers investors to make informed decisions, considering factors such as return on investment, property management, and financial calculations.
