It’s Your Move!

The real estate game is primed to get a little more interesting in the very near future. With the Federal Reserve tipping their hand a bit regarding an increase in interest rates we are expecting an increased urgency to buy in the short term.

Since the 2008 financial crisis The Fed has purposely kept interest rates low to help the market recover, but over the next six months the experts all agree that the rates will begin to rise.

So, what does this all mean to you? Maybe nothing, but if you are considering a move the rise in interest rates will mean that the average home buyer will be able to afford less because of their changing debt to income ratio. And that can mean a lower demand for homes in a certain price range.

To make a long story short, if you’re on the fence about buying a new home for personal or investment purposes, we’d strongly recommend jumping off that fence! You’ll find that you can afford more house and you’ll save yourself quite a bit of money over the life of your mortgage.

Loan Constant

Is a measure of your annual Cash Outflow as a percentage of the loan amount. It is calculated as Annual Loan Payment/Loan Amount

Annual Spread %

Cap Rate – Loan Constant

Annual Spread $

Cash inflow – Cash Outflow

Unleveraged Return

Calculated by Net Operating Income divided by Cash Required to Close. It is important to compare your Unleveraged Return to Leverage return to determine if you have Positive Leverage (ideal), Neutral Leverage or Negative Leverage.

PMI

Mortgage Insurance if required

Effective Return on Investment

This is similar to Cash on Cash Return but also includes appreciation, and mortgage principal paydown to illustrate a more complete return.

Cash on Cash Return

An annual measure of a real estate investor’s earnings on a property compared to the amount the investor initially spent to purchase it and make it operational.

Your cash-on-cash return is your annual cash flow (pre-tax) divided by your total cash investment.

Capitalization Rate

Calculated by dividing a property’s net operating income by its asset value, the cap rate is an assessment of the yield of a property over one year. For example, a property worth $14 million generating $600,000 of NOI would have a cap rate of 4.3%. That means that you can expect a roughly 4.3% annual operating cash flow given the price paid for the property.

Gross Rent Multiplier

is a screening metric used by investors to compare rental property opportunities in a given market against each other. The GRM functions as the ratio of the property’s market value over its annual gross rental income.

Debt Coverage Ratio

is a metric that looks at a property’s income compared to its debt obligations. Properties with a DCR of more than 1 are considered profitable, while those with a DSCR of less than one are losing money.

Other

Any other costs you will be covering for the property. i.e. if you are going to pay for the pool maintenance then the Gross rent would be higher but you would include that cost here.

Maintenance Percentage

What do you anticipate it will cost per year to maintain the home from a Landlords perspective? Older homes will be higher than newer homes.

Real Estate Appreciation

What do you anticipate the property appreciating annually?

Closing/Fixup/Misc Costs

Include all Buyer costs at closing AND the cost you will put into the property after closing to get it ready to rent.