If your ambition is to make money in real estate, you’ll need to start by mastering real estate math. Otherwise, you risk making important decisions in the dark. Getting scientific with your decision making is a surefire way to boost your profitability.
It’s a great idea to have a few key sums at your fingertips. Without having to rack your brains, you should know that an acre is 43,560 square feet, a yard is 3 feet and a square yard is 9 square feet. Before taking the plunge into investing, make sure that your mental math for real estate is up to scratch.
Being able to calculate the area of a room by multiplying its width by its length is the starting formula that should be second nature to any budding investor. Sellers often overestimate the size of a room resulting in an ‘optimistic’ estimation of the property as a whole. Even if each room is rounded up by just half a square meter, this can make a substantial difference. You could end up paying more than the actual market value. To avoid this, always bring a measuring tape to house viewings and jot down the dimensions of each room. Spotting even a small difference could prove to be a handy bargaining tool at the negotiation table.
Have you ever heard the term ‘frontage’ and wondered its precise meaning? It is defined as the width of a lot when measured from the front. In certain listings, this is abbreviated to FRTG. Frontage is sometimes referred to as Front Door when describing commercial real estate. A property’s frontage is often accompanied by a depth calculation. Multiplying frontage and depth gives you the size of the lot. When considering a commercial real estate purchase, wide properties tend to be more effective for a business than narrow buildings. This is because maximum exposure is crucial for commercial success.
More than M2
Remember that there’s more to real estate math than square metres. Looking to finance your next big real estate move? You are probably going to need a mortgage and you will probably have to pay an agent commission. Get used to making calculations using percentages. For instance, 8% is eight parts of a hundred or 0.08. If the charge on the loan is 8%, you will take the principle and multiply by 0.08 to work out how much interest you will have to pay on a yearly basis. In a similar fashion, if your transfer taxes are due and the figure is 2%, you can easily calculate what you owe by multiplying the sales price by 0.02. There are a surprising amount of associated costs when buying a house, and if your margins are narrow, you will need to be as precise as possible.
Getting an advanced real estate education involves getting grips on more complicated math, e.g. calculations involving appraisals and depreciation. Like with all math, there is a step-by-step method for handling more complex calculations. Don’t worry – with some practice, working out the potential return on investment will become second nature in no time and cash flow projections will soon become as easy as playschool.