3 Must-Have Numbers When Evaluating a Real Estate Investment
The easiest way to quickly evaluate the feasibility of a real estate investment is by using benchmark numbers. The following calculations will assist you in deciding. However, there are often other factors that come into the equation, such as location, future growth prospects, and personal reasons. Use these calculations in conjunction with a big picture view when determining investment attractiveness.
Gross Rental Yield
Gross rental yield is useful when quickly comparing properties. Simply divide the Annual Rent by the Total Property Cost (including closing costs and any renovation costs).
Gross Rental Yield = Annual Rent / Total Property Cost
Capitalization Rate (aka Net Rental Yield)
The capitalization rate, also called the “cap rate”, is a mainstay of real estate investment analysis. It tells investors the potential rate of return based on the expected income from a property.
You calculate the cap rate of a property by dividing the net operating income (annual rent less annual expenses) by the current market value or acquisition cost of the property.
Capitalization Rate = Net Operating Income / Current Market Value
The Price-to-Rent ratio is a useful gauge for determining times to purchase, sell, or continue renting out your properties. For example, if you purchased when the ratio was 12 and the ratio is now 25, it may signal a good time to cash in your investment. This ratio allows for a quick comparison between different areas and even different units in the same area. A higher number signals more favourable sell conditions for a rental investor, while a lower number signals more favourable purchasing conditions when purchasing to rent.
Price-to-Rent Ratio = Current Market Price / Annual Rent