Many real estate investors face the dilemma of whether or not to use a real estate investment calculator. Therefore, the question we are going to answer today is whether you need one or not for your real estate investments. Keep reading.
A real estate investment calculator is also called an investment property calculator and a rental property calculator. It is basically an online tool that is specially made for real estate investors. What it does is computing real estate metrics that are relevant to a certain investment property. It helps real estate investors spot the best real estate investment properties.
Now, if you are wondering about its cost, then yes, it is a tool that you pay for. Therefore, you will have to set a budget for it within your property expenses.
Before we tell you whether it is a luxury or a must, here is what real estate investors use it for:
Perform real estate investment property analysis
The real estate investment calculator is “the tool” when you want to perform accurate investment property analysis. This analysis consists of two components (or stages): the location and the property valuation methods.
The location of your property is the key to your business success. In fact, no matter what you read or hear about real estate investing, you are always going to hear the phrase “location is everything”. This is because, obviously, the location of your investment property plays a major role in your property’s performance.
If you are investing in rental properties, then the right location is a key element. The real estate investment calculator will help you choose the best one for your real estate investments. It takes into consideration the rental strategy you choose to work with and tells you whether a certain location is suitable for it. It also does the opposite. If you choose a certain neighborhood and do not know what rental strategy goes best with it, then it will tell you exactly that.
As for property valuation methods, they are really real estate metrics that are used to predict the profitability of an investment property. Based on that, you can decide whether or not buying an investment property is worth it for you. Here is an in-depth idea of the most important metrics that the real estate investment calculator indicates:
The real estate investment calculator is used to calculate cash on cash return (CoC)
Cash on cash return is one real estate metric to calculate the return on a certain investment property. The good thing about cash on cash return is that it calculates the return on investment taking into consideration only the amount of dollars involved. Therefore, it looks at the investment property financing strategy and eliminates any borrowed money from its calculations.
For example, if you buy an investment rental property that is worth $100,000 all in cash, the cash on cash return will consider the whole amount. However, if you buy the same property with a mortgage paying only 20% in down payment, then it is only going to consider the 20% you have put on the property. Here is the cash on cash formula and a demonstration of how to calculate it:
Cash on cash return = Net operating income (NOI)/Actual dollars invested x 100%
Now, let us suppose that your investment rental property produces $10,000 in NOI. Here is how you do it based on the previous example:
CoC = $10,000/$100,000 x 100% = 10%
Taking the same example, let us say that you got a mortgage of $80,000, and you have paid $20,000 in down payment. Apply the same NOI with the difference of the actual cash invested:
CoC = $10,000/$20,000 x 100% = 50%
As you can see, that is a huge difference between the two calculations. That is due to the cash invested. That is exactly why we always recommend that investors use external financing instead of paying all in cash. Sure enough, by now you know that the higher percentage you get, the better indicator it is for you.
The real estate investment calculator also calculates the capitalization rate
So, the capitalization rate (or the cap rate) is another vital real estate metric. Mostly, real estate investors use it for commercial real estate properties. Investors use it to estimate the overall worth of an investment property. So, the real estate investment calculator computes the cap rate regardless of the financing strategy. The formula for cap rate is almost the same as the cash on cash return. The only difference is that you divide the NOI by the overall property value. Here is a demonstration of the previous example of a cap rate formula:
Cap rate = Net operating income (NOI)/Market value of the property x 100%
Cap rate = $10,000/$100,000 x 100% = 10%
When investing in a certain property you want to get higher cap rates. However, keep in mind that higher cap rate comes with higher risk. Also, there are cases when you should not use the cap rate as a determining factor when buying an investment property. The cap rate is an estimation of profitability in the long term. Therefore, it makes no sense to use it with short-term investment strategies.
Real estate investment calculator: Luxury or a must?
The way we see it, a real estate investment calculator is an absolute must. In order to be able to perform accurate calculations, you need tools to help you. Sure enough, you can use manual old-school methods such as spreadsheets. However, one mistake will cost you a fortune. It is always best to use professional tools in such delicate matters. Though it will cost you a bit extra, you will know for sure that you get accurate data on an investment property. After all, a real estate investment calculator relies on real estate market analysis as well as real estate comps and historic market facts that will help you predict the future of a certain real estate market.
Now, if you have made up your mind on using a real estate investment calculator, check out Mashvisor’s. Mashvisor’s rental property calculator is one of the best analytics tools you could find on the internet. It relies on up-to-date real estate market data analysis. Therefore, we guarantee you the best results in real estate investing.