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We help real estate investors in Houston get the information they need. Knowledge is power and those who understand the numbers best, win at investing in real estate. As an investor, there may be no more important factor in the success of your business than your ability to run the numbers. Whether you work alongside a mentor or go it on your own, here are 5 formulas Houston real estate investors need to know.
The capitalization rate or cap rate formula is a valuation technique that Houston real estate investors need to know to calculate the rate of return based on the annual expected income of the property. This ratio is achieved by dividing the net operating income by the current market value. By comparing this number among properties of interest, you can easily assess an average cap rate. This data informs investors as to which properties are overpriced or are a good bargain. Remember, some of these numbers have the potential to be adjusted by decreasing overall costs through better management or in raising rent, so be careful not to toss out properties without a full examination of the data being provided.
This formula is used by Houston real estate investors to calculate how much of the investment cost that the rent will cover. This is something an investor needs to know prior to , to ensure that they won’t be losing money on the investment, and that they are at least breaking even monthly. If they aren’t, the rent will need to be increased accordingly. By knowing this formula, you can determine if the rent required to cover the investment falls in line with the average rent on comparable rentals in the area. In order to perform this calculation, multiply the purchase price, plus the total of the estimated repairs, by one percent to determine your base monthly rent.
While the gross rent multiplier is one of the important formulas Houston real estate investors need to know. This is a simplified way to analyze the value of a property without a full analysis, helping investors compare buildings and provides a rough estimate of the value of the real estate. This number must be used as a comparative and only provides a part of the overall picture of the potential of the property.
This metric allows you to evaluate the cash income that would be earned on the amount of cash invested in the property before making a purchase and is an important formula that Houston real estate investors need to know because it includes using leverage or a loan in the calculations. If the number is lower than ten percent, you may wish to reconsider. The cash invested would need to include any cash put down on the property, closing costs, as well as repairs, or any initial outlay of cash. Cash flow is the annual rental income divided by all annual expenses. Be certain to include taxes, insurance, the mortgage, and all other expenses.
Investment properties can gain income from sources other than rent, which makes this formula something Houston real estate investors need to know. This could include storage or parking fees, laundry facility income. To calculate the gross operating income (), subtract the credit and vacancy losses from the gross potential income.
We buy houses in Houston in any situation including a divorce. We are local home buyers in Houston that pay cash for houses. If you need to sell your house fast in Houston then we can provide a fast, fair and free offer for you. At Sunrise House Buyers TX we are happy to guide you through these and all of the other formulas investors need to know. Familiarity with these formulas helps Houston real estate investors and when fully understood they can be quite exciting! Get started by calling Sunrise House Buyers TX at 281-886-8644 or sending us a message today!