Calculating Equity Build Up For Real Estate

Описание: This video talks about how to calculate equity build up rate for real estate investments and what that means.

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Transcript:
Equity Build Up Rate is a simple calculation that solves how much equity you earned in year 1 relative to your initial cash investment in the real estate property.

In order to solve your equity build up rate, first, you need to know your mortgage or loan information. Let’s say that you plan on borrowing $100,000 and your interest rate is 5% and your loan term is 30 years. With these loan parameters, your monthly payment is approximately $537. When multiplied by 12, that is approximately total loan payments of $6,444 dollars in year 1. Of that 6,444 dollars, 1,478 of that is principal and 4,966 is interest. If you aren’t good with numbers, just understand that part of your loan payments go to principal and some go to interest. You should use a mortgage loan calculator to do this math regardless.

Now that we know how much of your rental loan payment went to interest and how much went to principal, we need to take the principal amount and divide that by the amount of cash you plan to invest in the rental property in year 1. This percentage rate will be your year 1 equity build up rate.

As I state in other videos, this is not a useful calculation beyond year 1 as it does not factor in the time value of money. This should only be used in year one in order to compare with other competing real estate investments.

If you don’t hear anything else in this video, you need to hear this, equity build up rate is not something that should be used on its own to measure a rental property’s year one return. Quite frankly, on its own, this is not a very important real estate calculation.

Rather, in order to make it important and give it meaning, it should be paired with your year 1 cash on cash return. When added to your rental property’s cash on cash return, it gives you a total year one return number.

If you think about it, in year one there are going to be two sources of return on your real estate investment. The first is cash flow and the second is principal. When you take the total of those two numbers and divide it by your initial cash invested in the rental property, it will give you a total return number that should be useful when evaluating your real estate investment.

To have this real estate calculation done with a calculator, visit our real estate investment calculator. It automatically calculates your rental properties cash on cash return and equity build up rate. All you need to do is enter your estimates and projections. As always, the calculator is only as good as your ability to estimate your income, expenses and the like.

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Year 1 Equity Build Up Rate = Year 1