9 Numbers For Property Valuation Calculations for Income properties

Knowing your numbers for real estate investing is key! Here is a nice article on how you can use different valuation calculations to ensure you are on track to make a good investment!

9  Numbers For Property Valuation Calculations for Income properties 

As real estate agents, we rely on "valuing homes and properties" by looking at what has sold the last 6 months but when it comes to investments, you need to look at more than what the home cn sell at that point! There are more calculations and information you will need to consider - depending on the type of investment you are looking to do. Any property value calculation will require analysis of key numbers, such as the down payment, mortgage payment, and interest rate,  but as an investor you will need to know and consider more. Before sitting down to calculate property value, make sure you have taken the preliminary step in gathering all the numbers and supporting documentation  that are commonly required in these analyses:

1. Mortgage Payment: A mortgage payment is the monthly payment made to the lender against the property loan. A portion of the payment will help pay off the original loan principal, whereas the other portion is interest paid to the lender. The mortgage payment may or may not include property taxes and insurance.
2. Down Payment: A down payment is an initial cash payment that represents a percentage of the property’s total purchase price. Although homebuyers who take out a Federal Housing Administration (FHA) loan or plan to occupy the property can put down as low as 3.5 percent, most investors should expect to make a down payment around 20 to 25 percent of the purchase price.
3. Rental Income: Investors often utilize a projection of rental income in order to qualify for a mortgage loan. A rental income that covers more than just the monthly mortgage payment will be viewed as less risky by the lender and can result in better loan terms.
4. Price to Income Ratio: The price to income ratio is a popular housing affordability measure. The ratio compares the median household price and median household income in a given area. Housing becomes more affordable as the ratio decreases.
5. Price to Rent Ratio: To find the price to rent ratio, divide the median home price by the median annual rent in a given area. The ratio measures the relative affordability of renting versus buying in a given housing market. Investors should avoid investing in markets with high ratios, such as 20 or above, as it signals a more favorable market for renters.
6. Cash Flow: Cash flow, often measured on a monthly or annual basis, measures the net income generated by a property after netting out any expenses and mortgage payments from rental income. Cash flow is positive if there is a remaining balance after all expenses and payments for that specific property are made. Conversely, negative cash flow results from the rental income not being enough to cover the owner’s expenses for that specific property. Investors should always avoid properties with a projected negative cash flow.
7. Gross Rental Yield: The gross rental yield provides investors with the annual income generated by a property, measured against the total purchase price. To find the gross rental yield, find the total rental income for one year, also known as the rent roll, divided by the property’s total purchase cost, including closing costs, fees, and renovation costs. Shown as a percentage, a higher rental yield signifies a better investment.
8. Capitalization Rate: The capitalization rate, or cap rate, can show the potential rate of return on a given real estate investment. It typically takes the gross rental yield a step further by considering the property’s operating expenses. A simple formula for finding cap rate is to divide the net operating income (NOI) by the property’s sale price.
9. Appreciation - how much do homes in the area of the property appreciate per year or given a time period. Usually this rate is between 1-3% depending on where you are in the nation. This is a key element to know for your investment. A high appreciation rate will show you the increased demand in the area. Then you can evaluate how many rentals are in the area vs single family homes. 

More explanations of this can be found in our Investor portal!