Pondering a Real Estate Investment? Keep These Key Factors in Mind
There’s no disputing that a timely investment in the right real estate property can prove highly rewarding for a savvy investor. But what makes a potential property the “right” one? Pay special attention to the following key factors in determining the potential attractiveness of a real estate property.
Cash flow serves as a crucial consideration if you plan on investing in any commercial property. A business can generate huge revenues and still prove relatively unprofitable if it spends more than it earns. You need to know how much money the property has left over after it pays its ongoing expenses.
Loan to Value Ratio
Loan to value (LTV) is the ratio between how much your lender will give you and how much your property costs. Your lender will use this number to calculate your interest rate. The lower your LTV, the lower your interest rate will probably be, although it might require a larger down payment.
If you’re investing with the aim of coming out ahead on the deal, the word “return” should figure prominently in your real estate investment considerations. Here are some important return metrics to evaluate.
- Cash-on-cash return gives you a clear picture of how much cash return you’re earning from your real estate investment.To figure this number, divide the post-mortgage net cash flow by the total amount of cash you’ve got tied up in the investment (including your capital expenditures and your outstanding mortgage balance).
- Internal rate of return (IRR) refers to the interest you can expect to earn each year off your real estate investment for as long as you hold the property. This calculation uses projected cash flow figures to predict the effects of compound interest on your earnings.
- Return on investment (ROI) gives you the big picture on how much you’ll likely make off of your investment. Divide your net profit by your original cost of investment to get your ROI percentage.
- The capitalization rate measures the net income of a real estate property. To get this figure, divide your net operating income by the property’s sale price.
The points listed above are just a few of the considerations that go into intelligent real estate investment. Even when you know what to look for in a potential investment property, you may still need professional help assessing the numbers and making the smartest decision. Hard Money Lenders Arizona has the necessary skills and expertise to guide you through your search, interpret the facts and figures, and assist you with financial funding questions and answers. Contact us today.