Every investor aims at performing property value estimations as it is a vital part of making smart decisions. Whether you use your system or an online tool, using a reasonable property value estimator can clear confusion and prevent mistakes that happen too often during complex financial calculations. Given below are some of the significant approaches to property value calculations that include a step-by-step guide regarding the ways to make the calculations. Keep reading to find out more about determining the best property value estimator for your real estate investment opportunities.
The best ways for accurate property valuation calculations
Irrespective of the type of property value calculation, it will need a working knowledge of key numbers, like mortgage payment, down payment, interest rate, and others. Before coming to the table for calculating property value, remember to take the primary step of collecting the figures, which are generally required in the following analyses.
The initial cash payment, which is the percentage of the property’s total buying price, is known as a down payment. Many property buyers go for a Federal Housing Administration (FHA) loan or think of occupying the house to put down as low as 3.5 percentage. In reality, maximum investors should be expecting to make a down payment of 20 to 25 percent of the buying price.
The monthly payment that is made to the lender against the total property loan is known as a mortgage payment. A part of the payment helps in paying off the main loan principal, while the other part is the interest paid to the lender. There are chances that the mortgage payment may or may not comprise of property insurance and taxes.
In many cases, investors utilize a projection of rental returns with the intent to qualify for a mortgage loan. Also, a rental income comprised of more than the monthly mortgage payment is considered less risky by the lender, which means it can lead to better loan terms.
Price to Rent Ratio
The process of finding the price to rent ratio involves dividing the median home price by the median annual rent in a given area. The ratio evaluates the relative affordability of renting against buying in a provided housing market. It’s wise for investors to avoid putting money in markets with high ratios, like 20 or above, this also indicates a more approving market for renters.
Price to Income Ratio
This is a famous housing affordability measure, known as price to income ratio. It is meant to highlight the difference between the median household price and the median household income in a particular region. As the ratio decreases, the housing tends to become more affordable.
It is generally considered to measure cash flow on a monthly or annual basis. In actuality, it calculates the net income produced by a property after netting out any costs and mortgage payments from the rental income. It is considered to be a good sign if there is any remaining balance after all the payments and expenses for that specific property is made.
On the other hand, negative cash flow is the outcome of insufficient rental income for covering the owner’s expenses for that particular property.