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How to Evaluate a Real Estate Investment Opportunity

In Denver Real Estate | on August, 03, 2012 | by | 0 Comments
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evaluate real estateThere are many kinds of investment opportunities worth considering both long and short-term, things like stocks and bonds, precious metals, alternative and green energy, even real estate. While real estate may not carry the same “gotta have it” glitter it used to, a qualified Denver Real Estate Agent can help investors evaluate the best investment opportunities on the market.

As in many parts of the country, Colorado Real Estate is beginning to recover in terms of value, and the best places to uncover a diamond in the rough are denver real estate listings. Through experience and training, a denver realtor can help buyers or sellers evaluate opportunities based on a number of factors, including several key numbers to watch out for.

  • Let’s say you’re relocating, and a travel agent denver also has referred you to a real estate investment, the first thing to look out for is your Estimated mortgage payment. For most owner-occupied homes, lenders prefer a total debt-to-income ratio of 36%, but some will go up to 45% — the maximum recommended by Freddie Mac — depending on other things like credit score and cash reserves. This ratio compares your total gross monthly income with your monthly debt payment obligations. For the housing payment, lenders prefer a gross income-to-total housing payment of 28 to 33%, depending on other factors.
  • Century 21 denver also has an honest discussion about the down payment and client brings to the table. Many investment properties can be financed with something as low as 3.5 percent, but many investor mortgages require something far more substantial – in the 20 to 25% range or even up to 40%. A key point your Real Estate Agent in Denver, CO will stress is none of this money can come from gift funds.
  • Rental income as a qualifying factor. Never assume that a tenant’s rent will cover the mortgage for an investment property. A consumer is in the best position when he or she demonstrates at least a two-year history of managing investment properties, and has bought rent loss insurance coverage for at least six months of gross monthly rent. Further, negative rental income from rental properties factors into the debt-to-income ratio.
  • Price to income ratio. This ratio compared the median price of Homes for sale in Denver to the median household income.
  • Price to rent ratio is a calculation comparing median home prices and median rents in the Denver market. Just divide the median house price by the median annual rent to generate a ratio. The ratio for the U.S. was 18.46 at the market peak in 2006, but plummeted to 11.34 by the end of 2010.

Finally, there are three other sets a numbers to pay attention to before investing in real estate: Gross Rental Yield, Capitalization Rate, and the ever important Cash Flow.

  • The gross rental yield for an individual property is derived by dividing the annual rent collected by the total property cost, then multiplying that number by 100 to get the percentage.
  • The capitalization rate, or cap rate or net rental yield, includes operating expenses for a property. Take the annual rent and subtract annual expenses, divide that number by total property cost and multiplying the final number by 100 to get to the percentage.
  • Cash Flow simply refers to cash on hand to cover the mortgage in case of a vacancy or unexpected maintenance costs.

With the proper research and attention to key numbers, a savvy investor can find solid investment opportunities in Denver real estate.

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