How to Quickly Calculate Must-Know Real Estate Numbers
Today we are going to go over some simple calculations that review what a point is, how to calculate monthly interest, Loan to ARV, and LTV. These are simple things that you will come across when you are talking to lenders about your lending needs. Here at Hard Money Mike we want to make sure that you not only understand what these are, but more importantly we want to show you how to calculate must-know real estate numbers.
What is a Point?
First of all, you are going to hear lenders say that there is a point on this loan, or two points on the loan. What does that mean to you? A point is a percentage of the loan, This is the fee or charge that they have for the loan that you are taking out. You will see anywhere between 1 and 3 points. Meaning that they are charging between 1% (.01) and 3% (.03) of the loan amount as an origination fee. It is important to know what this amount is because it will not only come out of your pocket, but it will add to your cost at closing.
Loan amount is $200K
Lender charges 1.5 points (1.5% or .015)
$200,000 x .015 = $3,000 origination fee
How do you calculate simple interest and what does that mean for a monthly payment?
If the lender says they are charging 10% (.10), that means that they are charging that amount as an annual rate. As an investor, it is important that you do the calculations in order to determine the monthly interest amount which is based on the loan amount. As an investor it is very helpful to have this broken down into months, because you may only have the property for 6 months instead of a year.
Loan amount $200K
$200,000 x .10 = $20,000 (annual interest amount)
$20,000 ÷ 12 (months in a year) = $1,666.67
$1,666.67 is the monthly interest amount
Loan to ARV
Most lenders are going to give their maximum loan based on ARV. Just to clarify. ARV is the estimated after repair value for the property once it is all fixed up. It is important to know what the market estimates the property will be worth after all of the work is completed, and are based on current sales in the area. A lot of the lenders are going to give their loan or a loan max based on the ARV.
$400,000 ARV (based on your comps)
Lender maximum loan to ARV is 75%
$400,000 x .75 = $300,000
$300,000 is the maximum loan amount that the lender is able to lend you.
What is Loan to Value?
A lot of lenders and banks are going to go off of the value of the property as opposed to the after repair value. When they talk about loan to value, lenders will take two things into consideration. They will look at the appraised value or purchase price, whichever is lower. Then they will lend a certain amount based on the current value.
Purchase price $300K
Lenders maxim loan is 80%
$300,000 x .80 = $240,000
$240,000 is the maximum loan amount that the lender is able to lend you.
As an investor it is great to understand what a point is, how to calculate monthly interest, Loan to ARV, and LTV. By learning how to quickly calculate must-know real estate numbers, you will be able to find the loan that best meets your needs.
If you have any questions or would like us to run through some other numbers, contact us!
Watch our most recent video to find out more about how to quickly calculate must-know real estate numbers.