The ultimate investment property calculator

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Investing in the property market can be incredibly rewarding, with historical data showing above average returns for real estate compared to other asset classes. While the situation changes dramatically based on location and wider economic cycles, property growth has been strong in North America since the 1970s. Increasing demand for property assets has created a number of opportunities for clever investors, although getting involved in the world of real estate is not without its challenges.

Why get involved with investment properties?

There are more investment opportunities available than ever before. Despite increased access to shares and other equities, real estate is the most tangible and high-yielding asset class with the most reliable and stable returns.

Unlike volatile liquid assets, the property market is fairly consistent. Growth curves are based on the predictable real world forces of supply and demand, with investors able to analyze property market data in order to find the best solution for their needs.   

Investing in property can be a great way to make money, including both long-term growth and short-term income. Knowing how and when to invest in real estate is the key, with different strategies needed depending on your overall goals and working budget. Generally speaking, you can make money from real estate in two different ways: capital growth, and rental income.

Capital growth occurs when the value of your property increases over time, with rental income generated when you rent out your property to a third-party. While these two scenarios are not mutually exclusive, they may involve different property types and often require different investment strategies.    

How to make money from real estate

While capital growth and rental income are the two primary ways to make money from the property market, you can extend your gains through clever tax strategies. Once you get the combination right between immediate income and long-term capital growth, property can provide you with a number of valuable opportunities.

Capital growth - Capital growth can be significant and is the primary reason why so many people choose to invest in real estate. Capital growth should be considered alongside the property's yield, with strong demand in certain markets helping property to appreciate in value over time when compared with the rate of inflation.  

Rental income - Renting out your property allows you to generate regular income and increase cash flow. While dealing with tenants and managing a property you don't live in can be challenging, access to rental income can help you to pay off your mortgage and provide you with funds for additional investments.  

Tax benefits - While you should never invest in property for tax benefits alone, tax awareness and a solid tax strategy can decrease your tax obligations, improve your income, and enhance your long-term capital growth. The tax benefits associated with the property market differ greatly depending on your location and financial status.   

A solid investment strategy often involves all three of these elements, with people renting out their property and setting up a tax plan before selling it to generate capital. While rental income can help you to pay off your mortgage, most of the money in the property market is dependent on long-term capital growth. Time and patience are both needed to generate significant returns, with location, property type, and property value also likely to affect your results.

How much equity you can build depends greatly on the location, with some cities and neighborhoods growing much faster than others. Before making any kind of real estate investment, it's important to understand market data and analyze market trends in your location. In order to take advantage of real wealth building growth rates, you need an asset which will provide above average capital growth.

There are many ways to analyze the market, including historical growth rates, current growth rates, forecast growth rates, time on market, and auction clearance rates. The property market is dependent on demand to drive prices, with insightful reports into supply and demand likely to be of real value. While past and recent growth rates can help you to forecast future growth, you need to be aware of oversupply and other changing market conditions.

Understanding the challenges and risks of property investing

Getting involved in the property market is not for the faint of heart. While there are plenty of opportunities to make money with real estate, the natural ebbs and flows of the market and large sums of money involved can make this a risky investment. Before diving into the deep end, it's important to understand the challenges and risks involved and do everything you can to mitigate against them.

High entry costs - Getting involved in the property market is not cheap or easy. Unlike other forms of investment, you need a significant amount of money to get started, with a 20 percent deposit standard for conventional loans and 3-5-10 percent required for FHA and other non-conventional loans.

Wider economic forces - The property market is not insulated from the wider economy, with recessions and other downturns likely to have a huge effect on property prices, interest rates, and other factors which will influence your return on investment. While the physical nature of property makes it safer than many other assets, it’s not immune to interest rate increases or other economic forces.

Lack of diversification - Due to the steep price of getting involved in the property market, most people purchase a single property and put all of their eggs in one basket. Few people can afford more than one property when they're starting out, which means you have to get it right or risk significant financial harm. High entry costs and potential market downturns are made much riskier due to lack of diversity.

Lost opportunity costs - An opportunity cost is the loss of other alternatives when a selection is made. Investing in property is likely to tie up most if not all of your available capital, along with lots of your time and resources. There are opportunity costs involved with this decision, including less money to invest in other assets, less freedom to move to a different city, and less time and money to spend with your friends and family.

Impact on lifestyle - Buying an investment property can have a negative impact on your lifestyle. While a real estate investment can be a great way to become more financially secure on a long-term basis, there can be immediate stresses related to mortgage payments, property maintenance, tenant problems, and other issues that may adversely affect your money, time, and mental health.  

Can I afford an investment property?

If you're thinking about getting involved in the property market, the first step is to perform a detailed analysis of your current and future situation. Whether or not you can afford an investment property depends on multiple factors, including personal information relating to your income and expenses, property and location details, and the wider economic forces that define the property market. Everyone has to deal with different financial and lifestyle pressures, so take your time and do your homework before you get involved.

Personal details

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Every investment property calculator starts and ends with you, after all, it's your existing capital, projected income, and debt obligations that will affect whether or not you can afford a mortgage in the first place. While the amount of money needed to buy property differs considerably from place to place and time to time, the actual methods used to ascertain your financial health are pretty much set in stone.  

You will need to work out your projected income, existing monthly expenses, and new expenses as a homeowner in order to get a rough estimate of how much you can afford. While the basic calculation simply involves adding up your income and subtracting your expenses, it's important to make calculations based on your new life as a homeowner rather than your current life as a renter. For example, you need to consider things like home insurance, property taxes, and home maintenance.

Deposit amount

A down payment is always required to purchase an investment property, with 20 percent of the home's value being the standard amount. While first-time home buyers in the United States can access FHA loans with a down payment as little as 3.5 percent, these non-conventional loans are not available to property investors. If you own an existing property, you may be able to use the equity from that property to help finance a new property deal.

Income and job security

Once you have a working deposit, you need to work out your take-home income after tax. It's important to look at your projected income for the term of the loan, with lenders also likely to look into the stability of your employment history. This is one of the biggest issues analyzed by potential lenders, with a number of well-known qualification ratios used to determine mortgage limits.

  • Your monthly mortgage payments should be 28 percent or less of your gross monthly income.

  • Your total housing payments, including things like property taxes and insurance, should be 32 percent or less of your gross monthly income.

  • Your total debt payments, including things like housing payments and credit cards, should be 40 percent or less of your gross monthly income.

Existing equity and assets

If you already own a home, your existing equity is also likely to come into play. Equity occurs when a property increases in value as the owner pays off the loan over time. The difference between the property value and the loan increases over time, with the borrower able to utilize this difference to help fund an additional property purchase. While new property investors are unlikely to have equity, existing valuable assets such as cars and boats may be assessed as part of the loan decision.    

Tapping into your property equity can allow you to build your portfolio and minimize the risk of your investment, with successful investors often using existing properties with strong rental yields to help finance new property deals. While building equity over time can be a great way to build a successful property portfolio, it's important to ensure that multiple mortgage repayments can be met if the market changes or interest rates rise over time.  

Existing debt

Your existing debt will be analyzed by banks and other lenders, so it's a good idea to take stock of how much you owe before you start the qualification process. From existing mortgages and car loans through to personal loans and credit cards, how much money you have going out on a monthly basis will have a huge effect on how much you can afford to borrow. As mentioned above, all of your debt payments, including your new mortgage, should be 40 percent or less of your monthly income.   

Credit scores and history

Your credit scores and history will play an important role in how much money you can access. There are three major credit bureaus in the United States, along with a proprietary model created by Fair Isaac Corporation (FICO). All scores from FICO, Experian, Equifax, or TransUnion range from 300 to 850, with a good score being 700+ and an excellent score being 750+.

In Canada, the situation is similar, although there are just two major credit bureaus in operation: Equifax and TransUnion. FICO recently announced that it would extended a multi-year agreement with Equifax Canada to distribute scores to lenders, consumers and businesses across the country. The scaling factor used is also slightly different, with credit scores ranging from 300 to 900 instead of 850. Good credit in Canada is roughly 720+, and excellent credit is 800+.

While it can take time, there are ways to improve your credit scores by reducing your debt as quickly as possible, keeping your credit card balances low, and eliminating revolving credit. While you're always advised to pay down debt rather than moving it around, debt consolidation can play an important role in some situations. You should also set up payment reminders, limit new credit inquiries, and keep old healthy accounts alive as a way to increase your credit age.

Property details

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Along with your personal financial information, the property type and purchase price should also factor into your decision making process. While this might go without saying, lots of people end up buying property that they can't really afford. As you make this important analysis, you need to account for the location of the property, the property type, renovation and maintenance costs, and expenses such as insurance and property taxes.  

Location

Location is always a key factor when it comes to real estate. Not only does the location affect how much the property sells for, it will also affect your rental yields and your ability to build equity in the future. While you can't generate cash flow or high growth through location alone, your property's performance is largely determined by where it is on the map.

When it comes to location, there's often a trade-off to make between desirability and price. While certain locations will always be in high demand, they will also be accompanied by higher prices. According to many, the best idea is to buy the worst house on the best street, especially if you have the skills to renovate and improve the value of the property over time. Buying in a location that's on the way up is the best way to minimize risk and buy into a market that hasn't yet peaked.

Some of the factors to look into include access to transportation infrastructure, proximity to places of employment and study, proximity to entertainment and eating venues, and proximity to parks and public places. Because everyone has different needs from a home, it's always a good idea to put yourself in the shoes of different demographic groups. You have two basic choices when it comes to location; either select a neighborhood that will appeal to a specific target market, or find a place with a wide market appeal.

Property type

The type of property you buy also has a huge influence on your budget. From detached houses in the suburbs through to townhouses and inner-city condos, it's important to find somewhere that meets your needs and those of the market. Investing in property is very different that buying a family home, with each decision you make needing to take the wider market into account.

Property types are often linked to specific locations, with different neighborhoods and cities attracting different kinds of renters and buyers. For example, condos are very popular in some neighborhoods but extremely rare in others. In order to make the most of your investment, you need to think about your target market and choose a property that will resonate with their budget and lifestyle needs.

Condos are often much less expensive to purchase than houses, which makes them perfect for new property investors. Condos are also more likely to be situated in desirable inner-city locations, which will significantly expand their market appeal.  All things considered, condos are a fantastic choice if you want to target single people, young couples, students, young professionals, or retirees. Houses are great if you want to target families, with other options including holiday houses, townhouses, and commercial real estate projects.

Construction and renovation costs

Buying an investment property is a long-term commitment which requires ongoing access to funds. While buying a less expensive property that needs work can be a good idea, you can't go into it blindly. Whether you plan on carrying out an extensive renovation or basic maintenance, all property investors are subject to regular expenses in addition to their mortgage payments.

Many investment property calculators fail to account for regular renovation and repair costs, which can eat into your profit margins. Estimating these costs can be extremely difficult, with each project and property subject to unique demands.

It's important to remember that repairs and renovations don't just cost you money, they can also leave your property empty and reduce your rental yields. When performing your analysis, it's important to think about construction and renovation costs in relation to the purchase price, rental yields, and potential sale price.

Taxes and other expenses

Property taxes, insurance, and other significant expenses should also be addressed prior to a property purchase. While everyone remembers to budget for their mortgage payments, lots of people forget to budget for condo fees, body corporate fees, property management fees, building insurance, landlord insurance, property taxes, home inspections, legal fees, and closing costs. It's also a good idea to create a contingency fund in the case of natural disasters or other nasty surprises.  

Market details

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Along with your personal financial information and the details of each specific property, it's also essential that you have a basic understanding of the forces that shape the real estate market. From macroeconomic cycles and interest rates through to growth reports and time on market figures, it's much easier to make money from real estate when you understand the data. Timing is also critical, with precision needed for short-term deals and patience required for long-term investments.

Economic cycles

Like most things in life, the property market ebbs and flows in a way that's not too dissimilar from a natural system. While timing isn't quite everything, buying and selling at the right time can have a huge effect on the amount of money you make. While there are lots of ways to get ahead, most successful investors have an ability to recognize upswings during the early phase of development. While some people get good results by copying the herd, this way of working can be risky as popularity and news often occur when the market is near a peak.  

Timing is also critical when it comes to making interest rate decisions. While a fixed rate mortgage can be very competitive in certain economic conditions, you don't want to be stuck at a higher rate if rates go down. In contrast, variable interest rates can end up being very expensive if rates go up and you're not locked down. While no-one has a crystal ball, understanding long-term and smaller fractal cycles can help you to time property market deals.

Time makes money

Along with precision timing, time on the market is a fundamental factor when it comes to property investment decisions. While timing comes first for "fix and flip" projects and other short-term investments, absolute time on the market is more important for most people with a traditional "buy and hold" strategy. At the end of the day, nothing delivers greater capital growth than time on the market, with population growth, reduced supply, and unsustainable growth in large cities leading to stronger demand year after year.

Understanding market reports

Having the ability to understand economic and property market reports is critical. While you don't have to be a professional economist or realtor, a basic comprehension of market data will give you a significant edge over other investors. First and foremost, it's important to understand growth rates for specific locations and types of housing. While you want to buy somewhere affordable, more than anything, you want to buy somewhere that's on the way up.  

By comparing past growth rates with current growth and forecast growth, you can get a pretty good idea of whether somewhere is on the way up or down. While it's important to be detailed, be aware of data blips. Quarterly and annual growth figures should be analyzed along with monthly results. Other valuable data includes time on market reports, auction clearance rates, construction figures, housing supply numbers, population and migration growth, and anything else that can give you an insight into supply and demand.

Buying an investment property requires patience, attention to detail, and a diverse skill set. Before jumping into the deep end or even applying for a mortgage, it's important to perform some calculations and work out what you can afford. The ultimate investment property calculator exists inside your own head, using specific information that is relevant to your lifestyle and budget.

First, you need to take a step back and analyze your personal financial information, including your income, expenses, and credit score. Secondly, you need to analyze specific properties based on their location, property type, and additional expenses. Last but not least, you need to research the wider economic conditions so that you can buy the right place at the right time.