Knowing when to buy and when to sell a property are the keys to your long-term success in real estate investing.This knowledge is gained from working with an experienced real estate agent who knows what is happening in the market, what is happening to rental / leasing opportunists and overall economy including interest rates.
You also need to be aware of qualitative measures that investors use to evaluate the suitability of properties to their investment strategy.These factors tend to be quick calculations that give the potential investor an indication of whether the property will generate the income and / or appreciation that they are looking for.
- Debt Service Coverage Ratio- Margin by which gross rental income covers fixed obligations
- Capitalization Rate (Cap. Rate) - Rate of return based on the operating profitability of the property as a percentage of the price
- Cash on Cash Return - Net cash return as a % of initial invested capital
- Gross Rent Multiplier - Relationship between expected gross rents and price. Used to compare price versus rents on differing properties.
- Expected returns will vary depending on state of the market and depending on the expected return on other, competing investment vehicles - i.e. there is an inverse relationship between expected returns on income property and price appreciation.
- These ratios will vary from community to community based on the perceived risk versus reward and also based on the anticipated price appreciation from market to market.
- Cap. rates versus cash on cash return - The importance varies depending on the type of property.1-4 family investments which require lower down payment will tend to have a lower cap. rate and a higher cash on cash return than buildings with 5 or more units which require a larger down payment but tend to produce a higher operating income due to economies of scale.
- Cap. rate is very useful to determine what price you should offer ona property depending on your requirements for appreciation versus income (cash flow).