Most people now realize that relying on one source of income will not give them financial security. Diversifying investments is the leading choice for all people aiming for financial stability in today’s unreliable world. One of the best investments for those looking for a hassle-free investment option that will also guarantee returns is rental properties, whether they be vacation homes or pre-sell condos.
Your first stop when investing in rental properties is a property management company based in Canary Wharf. Here, you will get all the information crucial to profitable rental property investment, more so the numbers that determine your expected income. Here are the key ratios the property managers will help you compute and understand when buying rental property.
Capitalization Rate
This is a kind of risk and reward calculation. It denotes the expected income value of your property after the deduction of its operating expenses. The computation starts with the addition of your annual rent with 100% occupancy and subtraction of your yearly maintenance expenses and taxes, then multiplying the number by 100. The capitalization rate will be used to determine the annual profits you will make and compare properties across different markets.
Price-To-Rent Ratio
This compares the annual median rental price, vis-à-vis the total cost of buying a property in a similar market. To get the ratio, get the median house price in the area you want to purchase rental property and divide it using the median yearly rent in the same area. The rule of thumb in rental investments is to buy a property when the aforementioned ratio is not more than 15, then rent the property when the ratio is above 20. Property markets with high price-to-rent ratios are generally not the best for rental investments.
CCR {Cash-On-Cash Return}
This is also called the cash yield and is generally used in commercial rental properties. It measures the annual cash flow before taxation of your property divided by the total amount of money you have invested. This way, you will get your property’s performance. Though it gives you a rough idea of what to expect, it is not reliable since it does not consider other elements in your property market.
DCR {Debt Coverage Ratio}
This is also called the DSCR {debt service coverage ratio}. It is calculated by dividing your total debt to finance the property with your annual net operating income. If your ratio is less than one, then this means that you will not have enough cash flow to service your mortgage. As such, most banks might turn down your loan request. There are different regulations on what DCR a bank considers a lucrative property investment but most opt for a ratio of 1.2-1.4.
For most people, rental property investment means getting property in a seemingly lucrative neighborhood and sitting back waiting for your profits to trickle in. Unfortunately, it is not easy. You should have a property management company by your side to help you make the right choice based on the above numbers and manage your property. This way, you are assured of at least 80% occupancy and profits from the property.
