Measuring real estate risk
There’s no doubt today’s property market is turbulent. Some States are booming and others are completely flat.
In such a highly variable market, how do you determine the right type of investment property and minimise your real estate risk?
According to EBM’s Executive General Manager of RentCover, Sharon Fox-Slater, crunching the numbers is the answer.
“Buying your home is an emotional decision. It’s often led by the heart. When it comes to investing in real estate however you need to use your head and keep emotion out of it,” she said.
“When you’re investing in property, you’re not just buying the land and building. You are acquiring an income stream. That’s why the financial aspect of the deal should be the determining factor.”
Ms Fox-Slater said there was a standard method used by industry to determine the financial pros and cons of an investment property – real estate property metrics.
“These standard measures analyse the financial characteristics of a real estate investment,” she said. “Looking at the financial indicators of a property, and not the lovely architecture or beautiful garden, keeps you focused on what’s important in a real estate investment deal – the numbers.”
There are nine key financial indicators that needed to be considered when investing, especially for income-producing real estate:
- Market value of the rent
- Return-on-cash invested
- Cost-benefit or profit
- Debt coverage ratio
- Break-even ratio
- Loan-to-value ratio
- Earning ability of the property
- Net cash flow after expenses
“It sounds mindboggling but there’s plenty of help available, including a wide range of online tools and other software which allow you to automatically calculate the real estate investment indicators in a matter of minutes and compare one investment property against another,” Ms Fox-Slater said.