Real Estate Cash Flow and Financial Analysis

A common buzzword in the investment property field is the capitalization rate , or "Cap Rate" of a property. This term refers to a number that is the ratio, or percentage, of the property's net operating income to its purchase price (or market value). It provides an indication of a property's financial performance. Properties that have higher cap rates are considered to be better bargains and provide higher returns for their owners than properties with lower cap rates.

The gross rent multiplier is one method that can be used to estimate the market value of a rental property. It is a quick and easy method to get a "ball park" estimate of what a rental property may be worth.

To determine how leveraged a property is in relation to its cost, the loan-to-value ratio is used. The higher this ratio is, the lower an owner's equity in the property becomes. Loans with high loan-to-value ratios are considered to be risky for both borrowers and lenders.

The cash-on-cash return for an investment property is a ratio (or percentage) that compares the property's real estate cash flow to the down payment applied to its purchase price.

To measure their risk in loaning money to rental property investors, lenders use the debt service coverage ratio . This is a ratio of the annual net operating income produced by the property to the total annual mortgage payments that are owed to the lender.

The internal rate of return for an investment property can be thought of as an interest rate that converts all future cash flows to equal the initial down payment on the property. This is probably one of the more difficult financial concepts to grasp but it does come in handy.

For some great, in-depth information on real estate cash flow and financial analysis, please check out The Landlord's Library book series. It presents the information in a step-by-step format with plenty of examples to provide better understanding and learning.

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