When it comes to purchasing a property, a house, an apartment or any other type of real estate, the one thing majority of people hate the most, are all the calculations that come with the investment (especially if you suck at math, at which most people do). But no worries, most of the formulas that you need to calculate to get the real picture of what and how much you need to pay are very simple, and all you need to have is one of the many real estate calculators you can buy at online and offline stores.
Real estate calculators don’t really differ much from ordinary financial calculators, but they do have some special features that make these specific calculations easier. Below are some of the top real estate formulas you need to know and understand if you want to make successful real estate deals.
The Cap Rate (Net Operating Income/Total Price of Property)
This formula will allow you to value apartment complexes and other commercial buildings. The cap rate is suppose to show you which apartment is good, or even better if possible, than other comparable buildings in the area. Aim at getting a cap 10 or higher. An extra tip: always use real numbers when calculating the formula with real estate calculators, not what the seller’s pro forma states.
The Rent/Cost (Monthly Rent/Total Price of Property)
This calculation gives you the idea of how much the cash flow of an apartment or any other rented property will be. This formula is good for people that rent apartments or small family houses. The target rent/cost percentage varies in different areas in different cities, so it’s always good to know the national average and set your expectations somewhere around this number.
Comparative Market Analysis
Comparative analysis is never accurate; it comes down to finding the best similarities to your apartment or house, and then making smart adjustments so that a buyer chooses your offer rather than your competitor’s. So, you can’t use any formula on any of the real estate calculators to calculate for this one.
The Debt Service Ratio (Net Operating Income/Debt Service)
This is important if you are getting a credit from a bank. Basically what you should expect is for this ratio to be above 1.2, as anything below 1.0 means you’ll be losing money each month, something banks don’t like.
Cash on Cash (Cash Flow/Cash in Deal)
This is the most important formula you should know if you have money in the bank. This will show you how much you will get on your money. Every time you invest money somewhere, in a business opportunity, in the financial markets, or as a deposit in banks, you should know this number. Not just for what to expect from you investment, but also to compare various investing options and choosing the best one.