Must know RE investment formulas?

Question

As a young future investor I have been trying to do some practice runs on houses in my area in hopes of figuring out how to estimate purchasing RE investment properties. Roughly speaking I've been practicing how to measure ROI's, Gross Rent Multiplier, and Cash on Cash returns. However I feel like there are some other important formulas I should be aware of when estimating the worth of a REI property. Any tips, websites, or formulas you all think I should look into when going through the process of figuring out the logistics of acquiring a REI property?

Thanks!

Andrew Fielder · Answer

@Andrew Rodriguez you need to understand how underwriters look at a property. Obviously they want to be as risk adverse as they can so they are going to use things like DCR, IRR, they wiull also typically use the lower value of the appraised value and purchase price. You need to know this when you go to get your financing. You don't want to put yourself in the position to have a really great deal but didn't understand how the financing works and miss out on the deal.

I can recommend commercial mortgages 101 by michael reinhart as a good introductory book to commercial real estate financing if that's the type of properties you're looking at. Even if it's just SFR still good to understand what the lender's thought process is,

Andrew Fielder · Answer

Total Return = income return + capital gain

Understand what underwriters look for ie. IRR, NPV of cash flows, Debt Coverage Ratio (DCR). You need to be able to put a DCF analysis together in excel.

I analyze a lot of development sites and you look at the residual value of the site ie. what can I pay for the site given XX% required profit margin, expenses, revenues etc. This analysis would also work for a rehab.

Andrew Rodriguez · Answer

@Andrew Fielder

Thank you for your insightful response! I will definitely incorporate these formulas into my REI acquisition process. One more question, I'm not too familiar with underwriters but how important are they and what roles do they play in the REI playbook?