Most real estate is bought for a specific purpose to issue and generate long-term, passive income. According to experts, this is still a very profitable business, although certain conditions need to be met. In the first place is the relationship between the price of the property itself and its potential to generate a satisfactory income through renting.
If it is an apartment that is bought on credit for rent, the amount of monthly rent must be the same or higher than the loan instalment. This doesn’t only ensure that renting is profitable, but it also makes sure that the whole endeavour makes sense. Also, when buying on credit, the cost of loan processing, interest, as well as other additional and mandatory services provided by banks under such arrangements should be taken into account.
What is Cap Rate Calculator?
To find out if it pays to run this type of business and invest in real estate, you can use a cap rate calculator. That will let you find out whether it is worth investing in this type of investment. It uses a simple algorithm that will help you get the cap rate of the real estate you want to invest in.
Cap Rate Formula
Cap Rate = Net Operating Income / Property Value
We will explain it in one example. Let’s say you decided to invest in one small apartment in the center of the city. In the table, you can see how much you need to invest and how much you will get by renting it later.
| Net Operating Income | $10,000 |
| Property Value | $100,000 |
If you put these values in the formula you will get your cap rate:
Cap Rate = 10,000 / 100,000
Cap Rate = 0.1
How to determine the property value?
Real estate valuation represents the value based on the market. Since the analysis is performed on the basis of published real estate ads in the past period, the estimated value using this calculator represents a realistic picture of the real estate market.
When you run a property valuation, you will get the average value of the property as one value. This does not mean that you demand exactly that price for your property. It may happen (which is very often the case) that your property has specifics that were not taken into consideration during this assessment.
For example, let’s assume that your property belongs to a larger municipality. It is also located in a part of the municipality that has kindergartens, schools, and shopping malls in the vicinity of downtown or it’s quite well connected with the city. With that in mind, you should value such real estate more than the average real estate price for the entire municipality.
Is it accurate enough?
You may wonder how accurate the assessment of the value of the property is. Well, it depends on the specifics of the property itself as well as on the number of similar properties that were published in the previous period. What is specific is that the results are more accurate.
For example, if your property is located in one city, it is very likely that the assessment will be incorrect if you enter another city to assess the value of the property. Therefore, the input data should be as specific as possible. On the other hand, if a valuation is required for a very small part of the city where there are not many real estate ads in the past, the valuation itself may not provide accurate data.
How to invest in real estate?
Of course, the best and happiest solution is to buy for cash. But if you are not one of those people who managed to raise the necessary amount of money to buy an apartment or were lucky enough to have a sudden financial injection, a home loan is the only option left.
The good news is that many banks offer options that are still very favorable. Both fixed and variable interest rate arrangements are available to clients. Observing the situation in the domestic real estate market during the last few years, one can clearly determine the constant increase in apartment prices, while the amount for rents in most cities during the same period also increased.
The mentioned trend has the consequence that the relationship between renting and selling apartments has not been disturbed, which is just another indicator of the justification of investing in real estate.
Of course, with higher rents and the possibility of constant occupancy, there are also higher apartment prices and higher participation amounts when buying on credit.
Which places are the best for investing?
Immigration potential
The potential lies in places that have the best high schools and colleges, due to which a growing number of students immigrate from the surrounding settlements and villages.
An additional possibility is created by the existence or announced opening of factory plants of foreign companies. That’s why a lot of workers also immigrate – often together with their families.
Large industrial centers
On the other hand, apartments in larger cities, especially industrial centers, bring greater certainty of regular occupancy of long-term rented capacities. At the same time, rents are much higher than in smaller cities, especially in areas where there are more representative offices of foreign companies or a large number of employees in the IT industry. That’s because they belong to the group of tenants who are willing to set aside larger sums of money for quality apartments on a monthly basis.
It is evident that the prices per square meter of apartments in smaller cities are significantly lower than in the capital or industrial centers and other larger cities. The apartments in these locations are much easier to buy because less money is needed to participate when you purchase on credit.
However, the fact that the amount of rental income will also be lower should be taken into account. Migrations to densely populated areas and large cities lead to fewer available jobs and lower monthly income per capita. As a result, reduced purchasing power is automatically reflected in the amount that potential tenants will be able to set aside for rent on a monthly basis.