Ok, ok so formulas are not a great way to spend a Sunday, but you will thank me when you purchase your first property and can look back at your performing investment and hopefully remember the bits of advice you received here!
The Debt Coverage Ratio is critical for comparing cash flow between properties. Also, lenders use various ratios, like the Debt Coverage Ratio, to compare equity to value, estimate cash flows, and other comparisons to determine if they can loan on the asset. As an investor, tracking the relationship between cash flow and debt in your asset is crucial because the a large portion of your asset is financed. High leverage (done right!)=ultimate profitability
Simple formula:
I/M=R
I-net operating income
M=Mortgage Payment
R=Debt Coverage Ratio
BONUS shortcut: the rule of 72
A fast calculation for determining how long it will take an asset to double or triple is the rule of 72. For example, say you are estimating that a Orlando, FL will see a growth rate of 9% per year. Sooo, how long will it take for a property to double in value?
72/I=Y
I=Interest rate
Y=Years to double
In this case it will take about 8 years to double.
Thanks for reading and stay tuned for more posts! If you would like to talk about owning your own real estate business please contact me or go to thethomaschristopherllc.com or follow this link for a webinar https://rent2ownmarket.infusionsoft.com/go/opportunity/thomasm/
Thanks and enjoy the football games!!
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