Real Estate Formulas for Investors

There is more to real estate investment than the property itself. A few decisions need to be made before you purchase the property. You will need to know certain calculations to make the right decision.

The Question you should ask yourself first; Are you holding the property as a rental or are you going to rehab it and flip the property?

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

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 offer FREE VALUATION but can provide inaccurate information.

Gross Scheduled Income

The Gross Scheduled Income Formula presents the amount of 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 against actual income.

Talk with your Realtor to view comparable rentals in the area. Many investors guess the rental amount or set the amount catered towards a return on investment. However, rental comps are as crucial as sales comps for marketing the property, You want to be conservative in your calculations while testing the cap in the market of your property’s location.

Real Estate Formula:

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

Gross Operating Income

Gross Operating Income reflects the total income generated by an asset including additional sources of income from your rental property. A few examples would be revenue generated from parking spaces, laundry, and vending machines

Real Estate Formula:

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 operating expenses from costs like insurance and maintenance fees.

Please note, amounts like property depreciation and interest payments do not factor into operating costs. 

Real Estate Formula:

Net Operating Income = Gross Operating Income – Total Operating Expenses

Capitalization Rate

An important formula for an investor to know is the Cap Rate. The cap rate formula compares an investment property’s net operating income against the market value, allowing investors to quickly compare property profitability.

Real Estate Formula:

Cap Rate = Net Operating Income / Market Value of Property

Cash on Cash Return

Determining your Cash on Cash Return is crucial in real estate investing. It’s widely utilized since it allows investors to compare investments and evaluate profitability. A spreadsheet is a great way to view side-by-side comparisons between properties that are similar. By setting up a spreadsheet with formulas, you can quickly calculate income and expenses to estimate returns.

To use the cash on cash return formula, you simply divide the 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 up-front fees you paid to acquire the investment property.

Real Estate Formula:

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 sought after 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 a Realtor is a good way to see how quickly an area is growing in value.

Real Estate Formula:

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

Price to Rent Ratio 

This figure shows projected rental income, versus the price a property was purchased for. This is useful when comparing residential real estate investments. Like other calculations, a spreadsheet with formulas can assist with quicker decisions.

Real Estate Formula:

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

Price Per Square Foot

The price per square foot formula proves useful when quickly comparing multiple properties. 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 in depth by pulling both rental and sales comps, which list the price per square foot (as-is, not post-rehab).

Real Estate Formula:

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

Return on Investment

The return on investment formula allows you to calculate how much of your initial investment can be recovered annually.

Real Estate Formula:

Return on Investment = Annual Returns / Cost of Investment

Cash Flow From Operations

Successful real estate investments should require 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 determine cash flow from operations.

Real Estate Formula:

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 purchase their investment, this cash flow formula can provide a better idea of what your cash flow is like after financing

Real Estate Formula:

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

Occupancy Rate

Occupancy Rate reflects the time that an investment property is rented out or vacant over a period of time. Your occupancy rate is an important indicator of 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 seek alternative housing if a landlord is not maintaining the property or did not complete some repairs required previously. Landlords can “promise” to fix things to get people to move in, while in turn causing them to move out as fast.

Real Estate Formula:

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 purchasing a real estate investment. Too high of a ration can indicate an up-hill battle to break even with an investment property and recoup debts.

Real Estate Formula:

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 helps set the right price without wasting days on market.

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.

Real Estate Formula:

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.

Real Estate Formula:

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

 

Real Estate Formulas for Investors

Joseph Walter Realty

 

If you have a question about buying or selling your home, please reach out to Joseph Walter Realty at 248-294-7849 or via email at info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty 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.

 

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For Sale by Owner and the Buyers Agent

Being a For Sale by Owner or FSBO, you will most likely still be dealing with a buyer’s agent. Many times, these buyer’s agent will seem as though they are there to help you, but THEY DO NOT REPRESENT YOU – THEY REPRESENT THE BUYER.

When you are selling a property or business on your own, be aware of the overly helpful buyer’s agent who has NO AGENCY AGREEMENT with you. They will present the offers on their forms and make all sorts of suggestions which will “HELP THE PROCESS ALONG” – most likely in their clients’ favor.

Read the purchase agreements all the way through and look for some of the following items:

  • OTHER ITEMS SECTION:
    • This is a section in almost all purchase agreements where custom requests are done, such as:
      • Seller to Pay XXX in Concessions
      • Seller to make all repairs from inspection
      • No EMD
      • EMD to be returned to buyer under all circumstances
    • Property Description Section:
      • Lists Appliances
      • Does it list other items you did not want to include
    • Taxes – make sure you are only paying for taxes on the days you are responsible.
    • Repairs – some purchase agreements have a section for inspection and municipal repairs and who pays them.

 

The buyer’s agent may also want to suggest you work with their title company. If your state allows, choose to do a split closing where you have a title company separate from theirs. Some states the seller picks the title company and other states the buyer does. There are also some states where an attorney is involved in all closings. You may want to reach out to a title company in your area to find out how your state does closings – you can call Inked Title who works nationally and someone can help provide information at 248-617-0004 or email info@inkedtitle.com

Do not feel pressured to use any services offered by the buyer’s agent.

(title company, home warranty, repair company, etc.)

 

Selling your home on your own has many moving pieces. Stay in control of your deal and stay in contact with the people you choose to provide services. A lawyer is always a good idea or a transaction coordinator to help review documents and get you to the closing with the greatest of ease.

A transaction coordinator is a licensed real estate professional who will charge a small fee or percentage of the sales price (much lower than the full service Realtor) to review docs, may help negotiate, and handle the process from offer to close to you getting paid.

If you have a question about buying or selling your home, please reach out to Joseph Walter Realty at 248-294-7849 or via email at info@josephwalterrealty.com

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty 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 VA Loan?

A VA loan is a mortgage loan in the United States guaranteed by the United States Department of Veterans Affairs (VA).

The basic intention of the VA home loan program is to supply home financing to eligible veterans. They also help veterans purchase properties with no down payment. A VA loan may be issued by qualified lenders.

Veteran Affairs (VA) does not originate loans, but sets the rules for who may qualify. They issue minimum guidelines and requirements for which mortgages may be offered while financially guaranteeing loans that qualify.

When you are selling your home, whether it is For Sale by Owner or traditionally with a real estate agent/Realtor, you will have to understand the offers presented to you and the financing they have been approved for.

Each type of financing can be different, and each have their pros and cons.

Who Can Get a VA Loan?

The program is for American veterans, military members currently serving in the U.S. military, reservists and select surviving spouses (provided they do not remarry) and can be used to purchase single-family homes, condominiums, multi-unit properties, manufactured homes and new construction.

VA Loan Benefits

The VA loan allows veterans 103.3 percent financing without private mortgage insurance (PMI) or a 20 percent second mortgage and up to $6,000 for energy efficient improvements.

A VA funding fee of 0 to 3.3% of the loan amount is paid to the VA; this fee may also be financed, and some may qualify for an exemption.

In a purchase, veterans may borrow up to 103.3% of the sales price or reasonable value of the home, whichever is less.

Since there is no monthly PMI, more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for larger loans with the same payment.

In a refinance, where a new VA loan is created, veterans may borrow up to 100% of a property’s reasonable value, where allowed by state laws.

VA loans allow veterans to qualify for loan amounts larger than traditional Fannie Mae / conforming loans.

Standard VA guidelines state that the VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills, although there is no hard limit to the DTI for a VA home loan.

Veterans have been known to be approved with a DTI of up to 80%, if there are other factors that strengthen their loan application. These factors include a low Loan-To-Value (LTV), sufficient residual income, additional income received but not used to qualify for the loan, good credit, etc.

Let me break down the pros and cons of this type of loan. This will allow you to get some insight on how the borrower was approved and what guidelines they will be facing.

VA Loan Pros and Cons

Pros

No down payment

This is the most significant benefit. Qualified borrowers can borrow as much as a lender is willing to lend, all without needing a down payment.

FHA loans typically require a 3.5 percent minimum down payment, and for many conventional loans it is a 5 percent minimum.

On a $175,000 home purchase, that is a $6,125 down payment for FHA and a $8,750 for conventional.

No private mortgage insurance (PMI)

Usually required for conventional borrowers who cannot put down at least 20 percent. FHA borrowers have mortgage insurance that is at the time of purchase and another that is paid monthly.

PMI typically disappears once you have about 20 percent equity in your home. There is no PMI on a VA loan.

Higher allowable DTI ratio

Lenders will look at the ratio of your total monthly income to your total monthly expenses. The VA typically wants to see a debt-to-income ratio of 41 percent or less. That benchmark is higher than what you would see on conventional and even FHA loans.

It is possible for qualified borrowers with a DTI ratio greater than 41 percent to still secure VA financing.

No prepayment penalty

VA loans can be paid off early with no prepayment penalties.

Refinance options

The VA home loan program has a pair of refinance loans that can help qualified buyers lower their monthly payments or get cash back from their equity.

The Streamline refinance, also known as the Interest Rate Reduction Refinance Loan (IRRRL), is for homeowners with existing VA loans.

The VA Cash-Out Refinance allows VA and non-VA homeowners to refinance and get cash at closing to pay down debt or take care of other needs.

Refinancing may result in higher finance charges over the life of the loan.

Flexibility with bankruptcy and foreclosure

Some borrowers who qualify can be eligible for a VA home loan two years after a bankruptcy or foreclosure. The wait can be much longer for different loan types.

Cons

not for everyone

The VA loan program is a benefit you must earn, which makes it relatively rare to obtain compared to other loan products. VA home loans are only available to eligible service members who have served their country in the United States military. Spouses of veterans who have died in the line of duty or because of a service-related disability may also be eligible.

VA Funding Fee

All VA loans come with a mandatory VA Funding Fee charged by the VA. This fee goes directly to the agency and helps keep the VA home loan program running for future generations.

It is a cost you can finance into the loan, and borrowers with service-connected disabilities are exempt from paying the fee. But this is not something you will pay on a conventional loan or FHA loan.

You can learn more about how much the VA Funding Fee is, who pays what and who is eligible for a refund.

VA Loans are provided For primary residences

This is not a loan program you can use to purchase a second home or an investment property.

Sellers are not always on board

Some home sellers are not open to receiving offers from VA borrowers. A lot of this undoubtedly has to do with some of the myths and misconceptions surrounding VA loans.

 

The information here is provided for informational purposes. The writer is not a mortgage or financing professional. It is always best to discuss financing matters with a mortgage or financing professional.

 

If you have a question about buying or selling your home, please reach out to Joseph Walter Realtyat 248-294-7849 or via email: info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty 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.

Michigan Licensed Broker 6505431020
Ohio Licensed Broker 2020008974
Florida Licensed Broker BK3491231
Texas Licensed Broker 9010704
Arkansas Licensed Broker PB00090741
Georgia Licensed Broker 79028

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3275 Martin Parkway, Ste. 125, Walled Lake, MI 48390

Buyer’s Markets

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Buyer’s Market 

Definition

A buyer’s market occurs when the supply (available homes for sale) exceeds demand (the number of buyers seeking to purchase homes).

Buyer’s Market For Buyers

If you are buying a new home, a buyer’s market is the ideal time to make your move. You might be able to buy a great home for a lower cost than you would in a seller’s market. This is the best market for you to get equity from the start.

Your Realtor has the ability to view market trends regarding pricing in the area you are looking in.

Not all homes will be affected by buyer’s markets.

Sellers who do not need to sell, sellers who can wait out the current market, and specialty homes where the seller knows there is value outside of market conditions.

There are still multi-offer situations in a buyer’s market. This situation may drive the price back to asking or above. Decisions will be made to get your dream home above what you were expecting or move on to find the bargain during the buyer’s market.

Buyer’s Market For Sellers

If you are trying to sell your property in a buyer’s market, your home may remain on the market longer before you’re able to secure a buyer due to the large number of available properties. You may also have to lower your listing price or make other concessions in order to secure a buyer. Your listing Realtor should help you find ways to maximize the value of your home. There are things you can do and offer to attract a buyer who is willing to pay the right price for your home. In a buyer’s market, you want to 1) make sure your home in priced right 2) make sure your home in prepared right and 3) make sure you home is marketed right (show all the value).

Buyer’s Market For By Owner Sellers

Many people try to sell their home For Sale by Owner during a buyers’ market in order to save money on commission. For some, this will work, but for many, they may not have the knowledge of the market, and negotiations skills in order to get the maximum pricing for their home. Using a Realtor can help you make more money on the sale of the home, above what you would have paid out in commission. Realtors do the research, know the values, and can make sure the purchase agreements are not in favor of only the side of the buyer. When a buyer’s agent sees that the property is FSBO, they tend to be more aggressive with lower offer and requesting additional concessions the seller may not realize they are paying out. Call on the professionals to help guide you through this market.

 

Buyer’s Markets

List Your Property

Service Coverage

Joseph Walter Realty

If you have a question about buying or selling your home, please reach out to Joseph Walter Realty at 248-294-7849 or via email: info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty 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.

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