10 Common Questions Asked By Real Estate Investors

Disclaimer: PropStream doesn't offer investing advice. Before making any investment decisions, we recommend consulting the necessary legal and/or financial professionals for your investment type.

Becoming an expert in real estate investing can feel overwhelming due to the abundance of information in the industry.

Even experienced investors with several deals under their belts often have questions to refine their strategies and maximize returns. From understanding market trends to evaluating a deal’s profitability, the right knowledge can make or break an investment. 

In this article, we’re tackling 10 of the most common questions real estate investors ask. Let’s dive in!

1. How do I calculate the cap rate for a rental property?

The capitalization rate (cap rate) is a metric used to evaluate a rental property's return on investment (ROI). Here’s how you calculate it:

Step-by-Step Process for Calculating the Cap Rate

Step 1: Determine the Net Operating Income (NOI)

Gross Rental Income: Total income from the property (e.g., rent).

Operating Expenses: Costs like property taxes, insurance, maintenance, property management fees, and utilities (if paid by the landlord).

Note: Exclude mortgage payments and personal income taxes from operating expenses.

Step 2: Identify the Property Value

Use the property’s purchase price, appraised value, or market value.

Step 3: Calculate the Cap Rate

Divide the NOI by the property value before multiplying it by 100 to convert it to a percentage.

Other Key Points Regarding Cap Rate

A higher cap rate may indicate higher returns but could also reflect higher risk (e.g., in less desirable areas).

A lower cap rate often suggests lower risk but might also mean lower ROI (e.g., in competitive or high-demand markets).

Compare the cap rate to other properties in the same area to evaluate its competitiveness.

2. How do I calculate cash-on-cash return?

The cash-on-cash return (CoC) measures the annual return on the cash you’ve invested in a property, giving you insight into your profitability based on the actual money out of pocket. 

Here's how to calculate it:

Step-by-Step Process for Calculating Cash-on-Cash Return

Step 1: Determine the Annual Pre-Tax Cash Flow

• Start with your Net Operating Income (NOI).
• Subtract your annual mortgage payments (principal + interest only).

Important note: Do not include depreciation, personal income taxes, or other non-cash expenses.

Step 2: Calculate Your Total Cash Invested

Include all the upfront costs you paid out of pocket to acquire the property, such as:

• Down payment
• Closing costs (e.g., legal fees, appraisal, loan origination fees)
• Rehabilitation or renovation costs (if applicable)

Step 3: Apply the Formula

Divide the annual pre-tax cash flow by the total cash invested before multiplying it by 100 to convert it into a percentage.

Other Key Points Regarding Cash-on-Cash Return

Higher CoC Return: Indicates a better return on the cash you invested.

Use for Comparisons: Compare CoC across different properties to evaluate the best investment.

Unlike cap rates, CoC accounts for financing (mortgage payments), making it especially useful for leveraged investments.

3. How do I calculate cash flow for a rental property?

Calculating cash flow for a rental property is a fairly straightforward process. It helps you determine how much money you’re making—or losing—each month or year after all expenses are paid (if done correctly).

Step-by-Step Process for Calculating a Rental Property's Cash Flow

Step 1: Calculate the Total Income

*Include all the money generated by the property

• Monthly Rent: Multiply by 12 for annual income
• Additional Income: e.g., pet fees, parking fees, laundry income, etc.

Step 2: Add Up Total Expenses

*Include all expenses related to managing and maintaining the property

Common expenses include:

• Mortgage Payment: Principal + interest (but not the full property price).
• Property Taxes
• Property Insurance
• HOA Fees (if applicable)
• Maintenance and Repairs (e.g., 1-5% of property value annually).
• Property Management Fees (if applicable).
• Vacancy Costs (e.g., 5-10% of annual rent).
• Utilities (if the landlord pays for them)

Step 3: Calculate the Cash Flow

*Subtract total expenses from total income

Other Key Points Regarding Cash Flow Calculation

• Positive Cash Flow: Indicates your property is profitable.
• Negative Cash Flow: Means you're losing money, which could still make sense if the property appreciates significantly.
• Use Estimates for Planning: For maintenance, vacancy, and utilities, use conservative estimates to avoid surprises.

4. What's the current interest rate for an investment property loan?

As of January 10, 2025, investment property mortgage rates are generally higher than those for primary residences. Typically, they are at least 0.5% to 0.75% above standard rates.

For example, if the average 30-year fixed-rate mortgage for a primary residence is around 6.5%, you might expect investment property rates to start between 7.0% and 7.25%.

Keep in mind that these rates can vary based on various factors, like:

• Credit score
• Loan type
• Down payment amount
• Lender's policies

Consider consulting multiple lenders to obtain custom quotes specific to your financial situation.

5. What's the difference between a conventional loan and an FHA loan?

A conventional loan is a mortgage loan that isn’t backed by the government. It typically requires a higher credit score, a larger down payment, and lower debt-to-income ratios than government-backed loans. 

An FHA loan is insured by the Federal Housing Administration and designed to help first-time or lower-income buyers with more lenient credit and down payment requirements (as low as 3.5%). However, FHA loans require mortgage insurance premiums (MIP) for the loan’s life, while conventional loans may not require insurance once sufficient equity is built.

6. How much can I borrow with a 20% down payment on a $500,000 property?

If you’re making a 20% down payment on a $500,000 property, you’ll typically pay 20% of the purchase price upfront, with the rest of the balance covered by your loan.

Important Note: Your ability to obtain loans will depend on various factors; this is just a sample formula. We recommend meeting with a financial professional to determine your options.

7. What are the pros and cons of a hard-money loan?

Pros

Faster Approval and Access to Funding: Hard money lenders can approve and fund loans much faster than traditional banks, often within days, making them ideal for real estate investors needing to close quickly.

Flexible Terms: When you use a hard-money loan, loan terms are negotiable and often tailored to your specific project or needs.

Easier Qualification: Lenders often focus on the property’s value (collateral) rather than your credit score or financial history, making hard-money loans useful for borrowers with poor credit or inconsistent income.

Finances Fix-and-Flip Projects: Hard money loans are perfect for short-term projects like house flipping or rehabbing distressed properties, as obtaining traditional funding for a fix-and-flip project is often unattainable.

Cons

High Interest Rates: Hard money loans typically have higher interest rates (8-15%) compared to traditional loans, making them expensive if held long-term.

Short Loan Terms: Loan terms are usually short, ranging from 6 months to 3 years, and require quick repayment or refinancing.

Higher Down Payments or Equity Requirements: Lenders may require 20-30% down or significant equity in the property to secure the loan.

Risk of Losing the Property: Since the loan is secured by the property, failure to repay can result in foreclosure.

When to Consider Using a Hard-Money Loan

Hard money loans are great for real estate investors, especially for fix-and-flip or bridge financing, but they’re not ideal for long-term holds or personal home purchases.

8. What is a comparative market analysis (CMA)?

A comparative market analysis (CMA) is a tool used by real estate professionals to estimate a property’s market value by comparing it to recently sold, similar properties in the same area. 

It considers factors like size, condition, location, and features to provide a data-driven pricing recommendation. CMAs are commonly used to help sellers set listing prices or assist buyers in making competitive offers. However, it should be noted that CMAs should not replace official appraisals but simply be used as a benchmark when estimating property values.

Related: What Is a Comparative Market Analysis in Real Estate?

9. What are closing costs in real estate?

Closing costs are fees paid by buyers and sellers to finalize a real estate transaction.

They typically cover services and tasks for transferring ownership and are settled at the closing meeting.

Common buyer closing costs include:

• Loan Origination Fees
• Title Insurance
• Appraisal Fees
• Prepaid Costs
• Escrow Fees
• Inspection Fees
• Recording Fees

Common seller closing costs include:

• Real Estate Agent Commissions
• Outstanding Liens or HOA Fees
• Title Transfer Fees
• Concessions
• Attorney Fees (if applicable)

10. What is the latest real estate investment news?

As of January 10, 2025, several notable developments have emerged in the real estate investment sector, like:

Luxury Apartment Oversupply: The U.S. is experiencing an oversupply of high-end apartments, with a national vacancy rate of 8% for multifamily units and 11.4% for luxury apartments. This trend is particularly evident in Sunbelt cities like Austin, where landlords are offering incentives to attract tenants.

Rising Rental Housing Demand in Los Angeles: The Los Angeles area is witnessing a significant increase in rental housing demand, partly due to recent wildfires' impact on existing properties.

Mortgage Interest Rates Remain High: Shifts in expert predictions suggest mortgage interest rates may not decrease as originally thought.

Let PropStream Help You Make More Confident, Informed Decisions!

Real estate investing involves many questions, but each one brings you closer to making smarter, more informed decisions. Whether you're assessing potential deals, calculating returns, or navigating market trends, staying curious and continually educating yourself is key to long-term success.

Let PropStream be your driving force behind evaluating deal potential! Now, with intelligent data (PropStream Intelligence™), you can use PropStream to get the most updated, accurate, and in-depth overview of a potential investment.