Revestor's patent-pending algorithm is made up of a series of “if, then” scenarios. Our proprietary formula creates a baseline assumption that's designed to help you decide if you should invest in a property. You can adjust the default settings to reflect your situation and investment criteria. Default settings will automatically update your key investment indicators and will instantly show the effects on your overall investment.
Revestor figures out the most relevant indicators in real estate. We can determine a property's cap rate, cash flow, cash-on-cash return, and return on investment. The higher these results are, the more likely it is that the property's a smart financial decision. All figures are in current United States dollars.
Revestor’s first calculations assume you plan on purchasing a property at its list price. You can use the sliders to adjust dollar amounts if you'll offer more or less.
To calculate Net Operating Income (NOI) and Cap Rate, we start with the purchase price of the property, the estimated gross rental income, and the most common expenses associated with owning a rental property. Common expenses often include estimate property taxes, landlord insurance, HOA fees (if applicable), vacancy rate (occupancy rate) and property management fees. You can always change the expenses and/or the expected income.
To calculate Debt Service Ratio (DSR), Cash-on-Cash Return (COCR), and Cash Flow, we initially assume that you will have a 20% down payment on a 30-year fixed amortized loan at the current market interest rate. You can change your financing to fit what you are qualified for and how you want to leverage your investment. If you're using all cash without any financing, simply slide your down payment to 100%.
To calculate Net Profit (before taxes and inflation) and Return On Investment (ROI) we initially assume that you'll hold the property for 5 years at an estimated appreciation rate of 4% per year. We also take into account 8% in closing costs when you sell the property.
You can also change your exit strategy from Buy and Hold to Rehab and Resell (Fix and Flip). We initially assume that you'll sell the property for 143% of what you bought it for, that you'll spend 10% in improvements, and spend 8% in closing costs. We even calculate how much it will cost you in mortgage payments and expenses between the time you acquire the property until you sell it (we initially assume that it will take you 5 months to fix up the property and resell it).
Refine search is a way for you to override the system and customize the search results to your own investment criteria. Once you save a search you are able to get alerts on future properties that hit the market that match your criteria. You can override the rental income, the financing, and set a minimum cap rate, cash flow, and cash on cash return.
How to Calculate NOI & Cap Rate
Purchase price is the price you as the investor pays for a property. As an investor, you should run the numbers to see what the maximum purchase price is in order for the property to be a good investment. You can then establish the maximum amount that you're willing to offer. The lower the price you pay, the more potential gains you have in the future. In an ideal scenario, it is best to buy at a price below fair market value or below the appraisal.
Rent is how much your tenant will pay you per month or per day to live in the property. Slide to the estimated amount that you think you'll be able to earn in rental income. Keep in mind that rent is likely to increase each year depending on your local market and any improvements you make to the property.
Occupancy rate is the percentage of the time that a property is occupied by a tenant. During the time that a property is occupied, landlords or hosts are collecting rent. Occupancy rate is the opposite of vacancy rate. For example: a 10% vacancy rate equals a 90% occupancy rate. Revestor assumes a 90% occupancy rate on long-term rentals. However, when average occupancy rates by zip-code and bedroom are not available on short-term rentals we assume a 70% occupancy rate. You can always adjust the occupancy rate.
Property tax varies by locality. We use a national baseline assumption of 1.25%. You can also input your personal property tax rate as a percent of your home's value if you know otherwise. For example, Hawaii tends to have some of the lowest property taxes while New York and Florida tend to have the highest.
Homeowner’s insurance is typically required by mortgage lenders. This number can be significantly higher if you pay high premiums for natural disasters and other risk factors such as floods or earthquakes. Landlord Insurance should be purchased as well if you're planning on renting out the property. Short-term rental hosts can even purchase special vacation rental insurance.
These are the monthly condominium or homeowners' association fees, if applicable. We bring in the HOA fees based on the information that is inputted into the MLS by the listing agent. Slide to the correct amount.
*Warning: Many HOAs do not allow short-term rentals (rentals under 30 days) so please check with your Realtor and read the HOA docs before purchasing a property to rent out on Airbnb or VRBO.
These are special property taxes imposed to help finance major improvements and services within a particular district. Special bonds and taxes used for Mello-Roos financing can only be issued by counties or districts in which two-thirds of the voters in the area have voted in favor of becoming a Mello-Roos district.
A property manager acts on behalf of the owner/investor/host to preserve the value of the property while generating income. They are typically paid a fee and/or a percentage of the rental income for managing the property. We assume 8% for long-term rentals and 16% for short-term rentals in the default calculations. The standard rate is about 8% across the country, but it can be double or quadruple that if you plan on the property being a vacation rental. Slide to zero if you plan on managing the property yourself.
How to Calculate DSR, COCR & Cash Flow
A down payment is the share of the purchase price that you pay upfront with your own funds. Our baseline assumption is 20%. Unless you are a Veteran using a VA loan, putting less than 20% down typically requires monthly mortgage insurance. VA loans and FHA loans allow for lower down payments, but you must live in one of the units. For example, you can buy a 4-plex property, live in one of the units and rent out the other 3 with 3.5% down on an FHA loan, or with 0% down on a VA loan.
This is the number of years until the mortgage is paid off. Our baseline assumption is 30 years. Some mortgages have shorter terms, such as 15 years. For example, one strategy may be to purchase a property when your child is born on a 15-year fixed mortgage, rent it out for less cash flow, then sell it for the child's college fund.
Interest rate is the portion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the outstanding loan. Owner occupied rates on conventional, VA, and FHA loans are less than non-owner occupied investment property rates, while hard money rates (typically used when flipping a home) can be much higher. Slide to the rate that you are approved for.
How to Calculate Net Profit & ROI
This is a long-term, conservative approach to real estate investing. A buy and hold investor is looking for monthly income through cash flow, equity through appreciation of the property, and the tax benefits of depreciation. For example, the end game may be to build a portfolio of properties that provide enough cashflow to live off of or to sell all properties through a 1031 exchange to then buy a commercial property that can be converted into a triple net lease (NNN).
The hold period or flip time is the length in which you will hold the property until you sell it.
Appreciation rate is the estimated rate in which the property will gain value. However, appreciation is volatile and unpredictable. The default is set at 4%. View historical trends in the neighborhood and slide accordingly.
Closing costs are commissions and fees associated with the future sale of the property. Closing costs can include commissions to real estate brokers/agents and any other costs associated with selling the property such as appraisal fees, inspection fees, home warranty, title fees, escrow fees, lender fees, etc. Closing costs are initially set at 8% (6% commissions + 2% in title, escrow, and loan fees). Some investors are able to get real estate agents, closing agents, and loan officers to discount their fees. Slide to your expected closing costs.
This is a short-term, advanced approach to real estate investing. A fix and flip investor is looking for quick profits by fixing issues with a property and selling it for a higher price. The end goal is to stay liquid by constantly finding, fixing, and flipping properties to maximize your profit on each deal. It takes a team to properly fix and flip a property to its fullest.
The resell price is the price you will be able to sell the property for in the future after appreciation and improvements.
Fix-up or rehab costs are the costs needed to fix up the property.
Key Investment Indicators
Net operating income is calculated by subtracting expenses from gross rental income. Expenses include taxes, insurance, HOA, mello-roos, management fee, vacancy rate, and maintenance.
This is the rate of return determined by the expected income that the property will generate. It is calculated by dividing the property’s yearly net operating income by the purchase price.
Debt service ratio (DSR) is the annual mortgage payment (excluding expenses such as taxes and insurance) divided by the annual net operating income. It is used to determine if the mortgage payments will be too high for the property to be a good investment. A good rule of thumb is to keep your DSR above 1.4%, otherwise you may be overleveraging.
Cash on cash return (COCR) is the rate of return you receive on your down payment. It is determined by dividing the annual cash flow into your down payment.
The overall return on investment is based on your exit strategy and is determined by dividing the net profit by your down payment. Investors can increase their ROI by holding the property for a longer period of time, lowering down payment, lowering interest rate, lowering the purchase price, raising rent, increasing occupancy rate, lowering expenses, and any combination thereof.
Net profit is calculated by subtracting the total expenses from the total revenue. Often referred to as the “bottom line.” Net profit is calculated before taxes and inflation.
Cash flow is the amount of net cash generated by an investment property after subtracting the net operating income and mortgage payments from the rental income. Cash flow lets you know if the rent will cover all expenses and mortgage payments.
This is one of Revestor’s proprietary algorithms that rates a property on a scale of 1-5. RevestorRating© is calculated by the strength of a property’s cap rate, cash-on-cash return, cash flow, and ROI. A property with the rating of 1 would have the least potential while 5 would have the most potential.
This is one of Revestor’s proprietary algorithms that estimates the daily low rent, average rent, and high rent by zip code and bedroom on short-term rentals.
Allows investors to sell a property to buy another for business or investment purposes without being taxed on any gains made from the original purchase.
The valuation of a property by an authorized person to determine the appropriate value to assign. This includes the current market value of similar properties, the quality of the property, and the valuation models.
Used as a baseline of value for a property. It is the original purchase price, plus any improvements made, minus losses and depreciation over time.
These are fees incurred on top of the purchase price and will be laid out in the final HUD-1 settlement statement. Fees typically include mortgage points, appraisal fees, loan origination fees, title insurance, fees for running a credit report, and any other imminent costs.
Fees incurred throughout the home's selling process and that will be laid out in the final HUD-1 settlement statement. They include the real estate agents' commissions, transfer taxes, title insurance fees, and other closing costs when selling a home.
The buyer of a property will deposit the payment amount for the house in an escrow account held by a third party until all conditions are met. This assures the seller that the buyer is able to making payment. Once all of the conditions to the sale are satisfied, the escrow transfers the payment to the seller, then title is transferred to the buyer.
This is the estimated market value of a property based on what an informed, rational, buyer is willing to pay an informed, rational, willing seller. Fair market value estimates may be founded either on precedent or extrapolation (calculation). Fair market value differs from the intrinsic value that an individual may place on the same asset based on their own preferences and circumstances.
A mortgage loan that’s Federal Housing Administration (FHA) backed and provided by an FHA-approved lender. Loans that are FHA insured are a form of federal assistance and historically have allowed lower-income Americans to be able to borrow money and purchase a home they wouldn’t be able to otherwise afford. FHA loans only require a 3.5% down payment since they’re backed by the government’s insurance. You must live in the property to qualify for an FHA loan.
The Flip Properties search option on Revestor searches distressed homes-for-sale that can be flipped for a quick profit. Revestor looks at comparable sales in the area and estimates what your net profit would be after fixing up the property and reselling it.
A guest is a traveler who rents out a room, entire house or apartment from a vacation rental host. Guests choose vacation rentals over hotels for the convenience, flexibility and/or price savings
The examination of a property's condition, usually for a property's sale. A home inspection assesses the condition of a property's roof, foundation, plumbing, heating and cooling systems, water and sewage, electrical work, and some fire and safety issues.
A warranty policy that a homeowner, buyer, or seller purchases to cover any unexpected repairs or replacements of major components and appliances in a home.
Airbnb promotes “becoming a host” to homeowners and vacation homeowners to earn money by sharing their homes with travelers. Hosts can rent out rooms, entire houses, or apartments.
Inflation is an increase in the general level of prices for goods and services, lessening the value of a dollar. In real estate, inflation has an impact on costs like utilities and renovations, which are assumed to increase at the going rate of inflation.
A fee charged by the lender for processing a new loan application. It is used as compensation for putting the loan in place. They are quoted as a percentage of the total loan and are generally between 0.5% and 1%.
An NMLS licensed person who helps borrowers obtain mortgage loans from banks or other lending institutions.
Gains on assets held for more than one year, taxed at lower rate than short-term gains. Assessed on the selling price of a primary residence exceeding the original purchase price by $500,000 (if filing as married), or $250,000 (if filing as an individual). Your individual tax situation may be different, so please speak with a tax professional. Capital gain taxes can be delayed or avoided through 1031 exchange(s).
The Long-Term Rentals search option on Revestor searches homes-for-sale on the MLS that could be rented out to long-term tenants.
Most active duty service members, veterans, and reservists are eligible for a VA loan. Issued by mortgage brokers, VA loans are guaranteed by the Department of Veterans Affairs (VA). They don’t require a full down payment, nor do they require private mortgage insurance. But, VA loans do require an upfront funding fee.
The VA funding fee can be avoided if the veteran has a service-related injury. Otherwise the VA typically charges 2.15% of the purchase price for first time use and 3.3% for subsequent use. VA loans require that the property be owner occupied, but veterans can buy a 2 - 4-unit property and live in one of the units.
A percentage of the original loan amount added every year. It's typically included in cases where the down payment is less than 20%. It can usually drop to zero during the year after the outstanding loan balance has decreased to less than 80% of the value of the home. You can also opt for lender paid mortgage insurance (LMPI). FHA loans require monthly mortgage insurance no matter what the circumstances.
A real estate agent is a person licensed to represent a buyer or a seller in a real estate transaction in exchange for commission. Most real estate agents work for a broker and are part of the National Association of Realtors.
This is a retirement account in which the individual investor is in charge of making all investment decisions. It provides the investor with a greater opportunity for asset diversification.
The Short-Term Rentals search option on Revestor searches homes-for-sale on the MLS that could be rented out as vacation rentals to short-term tenants on sites like Airbnb, VRBO, RentLikeAChampion, and TripAdvisor.
Title is the certification of ownership of a property.
A lease agreement that designates the tenant as being solely responsible for the net real estate taxes on the leased asset, the net building insurance, and the net common area maintenance. Because the tenant is covering these costs, the rent is typically lower, but the landlord has less headaches and management responsibilities.
These include electric, water, trash and sewage and are typically higher for homeowners and landlords than they are for renters. Every homeowner and landlord should account for these expenses based on the averages in the area.
The percentage of the time that the property is vacant and ready to be rented. During the time that a property is vacant, landlords are not collecting rent. Vacancy rate is the opposite of occupancy rate. Example: a 30% vacancy rate equals a 70% occupancy rate.
A vacation rental is a property other than the owner’s primary residence that is used for recreational purposes and rented out on a temporary basis to tourists as an alternative to a hotel. Vacation rentals differ from long-term rentals in the fact that they are churned with a lot more tenants, thus oftentimes harder to manage.