Greetings, and welcome to the first of a four part series. We get a lot of questions about the sources of our data, and how the calculations are made. These four posts hope to clear up the confusion, once and for all.
MogulMind’s property data (current value, bedrooms, bathrooms, etc.) is provided by Zillow. MogulMind has an agreement with Zillow which allows MogulMind to query and access its property information via the magic of the Internet. We then provide this information to you, always as we receive it, and sometimes plugged into our investment calculators.
Beyond that, the calculations/metrics/values presented are based off of the information that you provide about, your specific property. This is why it is important that you be conservative with your speculative purchase prices, renovation costs, etc. MogulMind takes these conservative estimates and plugs them into industry standard, time tested formulas for real estate evaluations: Cash-on-Cash Return, Cap Rate, Internal Rate of Return (IRR), Return on Investment (ROI), and Appreciation.
We want MogulMind to be more than just a calculator; it should be a deep resource to use at any stage of your investing career. So how do we arrive at all these values? It’s one thing to read a formula on Investopedia, it’s another thing altogether to see how your data gets plugged into the formula. If you’re new to investing and wish to learn more about these calculations, or simply want to know how we’re using your data, simply click just about any value for a summary. For example, clicking Cash-on-Cash in the rental view:
The Fantastic Five
Let’s call them the Fantastic Five:
- Cash-on-Cash Return
- Cap Rate
- Internal Rate of Return (IRR)
- Return on Investment (ROI)
These are the most common and important metrics used to evaluate investment properties. We will be discussing them and why it is important for you to understand them and how they can affect your success. You may be familiar with them, but do you understand why they are significant? Fortunately, you’ve got MogulMind to run the calculations, but as a real-estate investor, it is essential that you understand what they mean and how they can impact your real estate business.
We’ll begin with Appreciation and Return on Investment (ROI). Cash-on-Cash, Cap Rate, and Internal Rate of Return will each be discussed in future articles in this series.
Real Estate Appreciation is the increase in the value of property over a period of time. There are many factors that determine real estate appreciation, all of which are out of your control. Supply-and-demand, location, the economy, inflation, natural disasters, and the market. You can project appreciation, but it’s just an estimation. Don’t bank on it. The first step is to estimate future growth in the form of the appreciation rate. Zillow is one platform that can show you the predicted growth rate, current and historical. Once you have determined the future growth, you can move on to the second step. With your speculative appreciation rate in hand, you simply multiply and compound the current value for each year in your window speculation. This will give you the property’s future value. Real estate appreciation is important for investors that intend on selling their property several years later (typically 5 or more) after prices have risen significantly.
Return on Investment (ROI) is a measure used to evaluate the overall efficiency and performance of an investment property. ROI is a ratio of the money made money invested. It’s simple: you take your net profit and divide that by the total invested. Because of its simplicity, it’s often the bottom-line metric used to evaluate an investment property. Many real estate experts consider the ROI the most important number.
Stick with us! Stay Tuned~ Our next post will discuss the ever-important Cap-Rate for RE Investments.