To help guide you along, we look to an article on the eight numbers you need to know when investing in real estate. These include:
1. Your mortgage payment: Although lenders generally prefer “a total debt-to-income ratio of 36%... some will go up to 45% depending on other qualifying factors such as your credit score and cash reserves.” When working out this ratio, they take your gross monthly income alongside your monthly debt payments, and compare the two.
2. Down payment requirements: When it comes to an investment property, the mortgage most often requires a downpayment of 20 to 25% but it could even be higher. The amount you need to put down is up to the lender and is usually worked out based on your debt-to-income ratio, as well as your credit score, the price of the property and expected rent.
3. Rental income to qualify: When working out how to evaluate a property, ideally you’d like a tenant’s rent payments to cover your mortgage. But to get a mortgage approved based on this logic, your lender will require “a two-year history of managing investment properties, purchase rent loss insurance coverage for at least six months of gross monthly rent and any negative rental income from any rental properties must be considered as debt in the debt-to-income ratio.”
4. Price to income ratio: This number is worked out by comparing the median household price of an area to the median household income, and is one of the essential numbers to look at when asking the question of how to evaluate a property.
5. Price to rent ratio: As you can probably work out, this ratio is a comparison between median home prices and median rents within a specific market. You can work it out by dividing the median house price by the median annual rent.
6. Gross rental yield: Divide the annual rent collected by the total property cost then times that number by 100 and you’ll get the percentage. “The total property cost includes the purchase price, all closing costs and renovation costs.”
7. Capitalization rate: Sometimes known as “the cap rate” or “net rental yield”, this number is even more valuable than the gross rental yield as it includes the property’s operating expenses. Take your annual rent minus your annual expenses (repair costs, taxes, landlord insurance, vacancy costs, agent fees) and divide that number by the total property cost and then multiply the number by 100 to get the percentage.
8. Cash flow: To work out whether you have a healthy cash flow know that you should be able to cover “the mortgage principal, interest taxes and insurance with the monthly rent.” But cash reserves are important in the event of a vacancy or maintenance costs you hadn’t anticipated. The most direct way to avoid negative cash flow is to not borrow more than you can afford to buy the property.
Find out about how to evaluate a property in the Costa Blanca where, owing to the thriving tourist market and beautiful landscape for retirement living, rental property is always in high demand. Whether you want to settle down in one of the dreamy villas in Calpe or are looking to generate a healthy income from a property, get in touch with us to find out about our quality portfolio of apartments and villas in Calpe.