When investing in Real Estate many of you may or may not know where to start. Well, there are a few key points that are important to remember. Most important is "How is this property going to produce income for me?"
Key points I will comment on: Net operating income, Capitalization Rate and Cash on Cash Return
The way to find your Net operating income is based on net cash generated before mortgage payments and taxes. An example would be- 4-plex that each unit pays 1,000 a month. $4,000x12=$48,000 annual -maintenance fees and possible water/sewer/garbage (avg. we will say $12,000.) So the net operating income = $36,000
So now...to find the Capitalization Rate, which is very important percentage that helps determine the level of interest you might have for the property. The Cap Rate is used to compare properties with different valuations and also to place value on a property based on the income it generates. Basically, we take the NOI and divide it by market value. An example would be (NOI of $36,000/ market value of $450,000=.08 or 8% Cap Rate. Keep in mind that properties have good value when they generally have a Cap Rate of 6% or above.
Lastly, for Cash on Cash return ratios are best used for long-term investment properties. A properties annual cash flow/ net investment. How this would look....so lets say you invest $100,000 and your cash flow is $10,000 annually then your Cash on Cash return would be at a 10% rate. It is best to only look at this ratio when you have long-term properties.
There are other important factors to consider but you must know your Cap Rate when investing in Rental or any income producing properties. Make sure to know your market values through a REALTOR, like myself, before considering an offer. To simplify this to the extreme there are several software programs such as
www.landlordcashflowanalyzerpro
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