Property investment calculator is a term used to define an application that provides fundamental financial analysis underpinning the purchase, ownership, management, rental and/or sale of real estate for

profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...

. Property investment calculators are typically driven by

mathematical finance Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling in the financial field. In general, there exist two separate branches of finance that req ...

models and converted into

source code In computing, source code, or simply code or source, is a plain text computer program written in a programming language. A programmer writes the human readable source code to control the behavior of a computer. Since a computer, at base, only ...

. Key concepts that drive property investment calculators include returns, cash flow, affordability of financing, investment strategy, equity and risk management.

History

In response to 2007

subprime mortgage crisis The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis. It led to a severe economic recession, with millions becoming unemployed and many busines ...

and preceding US property bubble, a number of residential property investment analysis tools and applications were launched to the public by both government, commercial organisations and as part of open source projects. These analytical tools were developed to help real estate investors to understand the risk and returns of residential property investing. These included

mortgage calculator Mortgage calculators are automated tools that enable users to determine the financial implications of changes in one or more variables in a mortgage financing arrangement. Mortgage calculators are used by consumers to determine monthly repayme ...

, residential property depreciation calculators and property investment calculators. A number of web technology companies have also developed comprehensive all-in-one packages that provide financing, risk and return analysis, investment strategy and portfolio management capabilities.

Calculations

Typical calculations available from a property investment calculator: # Cash on cash return – Cash flow in year 1 divided by cash invested in the property. # Equity build up rate – Increase in equity in year 1 from mortgage principal payments divided by cash invested in the property. #

Capitalization rate Capitalization rate (or "cap rate") is a real estate valuation measure used to compare different real estate investments. Although there are many variations, the cap rate is generally calculated as the ratio between the annual rental income produ ...

– Net operating income (NOI) divided by property's asset value. # Gross rent multiplier – The ratio between a rental property's gross scheduled income and its market value. # Net cash flows – The amount of cash to expect to receive after expenses. # Net present value of future cash flows – The sum of net future cash flows discounted back to the present value using the time value of money to understand what future cash flows are worth today. # Gross rental income – The total rental income one expects to receive. # Operating expenses – All expenses associated with operating the property. These can include homeowner's insurance, property taxes, and maintenance expenses to name a few. #

Net operating income In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses. Operating income and operat ...

(NOI) – Net operating income is also known as net income and is income received after subtracting all operating expenses. This will exclude income taxes and interest. #

Depreciation In accountancy, depreciation refers to two aspects of the same concept: first, an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation i ...

– The expense associated with the depreciation of your property. For more information on depreciation, se
IRS Publication 946
# Tax savings from depreciation – The amount of taxes saved from using depreciation as an expense against income. # Debt to assets ratio – The ratio of debt remaining on the property to the value of the property or asset. #

Internal rate of return Internal rate of return (IRR) is a method of calculating an investment's rate of return. The term ''internal'' refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or fin ...

– Technically speaking, it is the discount rate at which the net present value of future cash flows equals $0. In laymen terms, it is the rate of return received on investment in a given year adjusting for the time value of money.

Types

# House flipping calculator # Rental property calculator # Investment property calculator

References

{{Real estate Real estate investing Investment

History

Calculations

Types

See also

References