Can You Measure Real Estate Risk?
By Sharon Fox-Slater on 29 Sep 2015
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Photo credit: Michael Coghlan, Creative Commons
There’s no doubt today’s property market is turbulent. Some states are booming and others are completely flat.
In such a highly variable market, how do you determine the right type of investment property and minimise your real estate risk?
Crunching the numbers is one answer.
Buying your family home is an emotional decision which is often led by the heart. When it comes to investing in real estate, however, you need to use your head and keep emotion out of it.
So where do you start? Thankfully there is a standard method used by industry to determine the financial pros and cons of an investment property – real estate property metrics.
By measuring nine key financial indicators, you will be able to analyse the financial characteristics of a real estate investment:
- Market value of the rent.
- Return-on-cash invested.
- Cost-benefit or profit.
- Debt coverage ratio.
- Break-even ratio.
- Loan-to-value ratio.
- Earning ability of the property.
- Net cash flow after expenses.
It sounds mindboggling but there’s plenty of practical help available, including a wide range of online tools and other software, which allow you to automatically calculate the real estate investment indicators in a matter of minutes and compare one investment property against other.
It’s the smart way to look at investment in any market.
