Rental Accounting in Practice; Appraising Properties based on Ratio Analysis

When it comes to real estate, ratios show year to year or month to month projection of rental accounts analysis, and it enables them to realise if for example properties which are rented are valuable against the money they have invested in the property, are the money received from rental properties able to recover the debt and how long does it take for it to be fully recovered. A brief description of few important real estate ratios in rental accounting is given below.

  • Capitalization Rate or CAP – RATE: is a ratio, which is used by investors, lenders and appraisers to estimate the market value of income producing properties. Appraisers commonly use the “Cap” rate to establish a property’s value or asking price. It helps to think of the capitalization rate as essentially the rate of return that you would like on your investment. The higher the Cap rate, the higher the expected return on your investment. Determining the Cap rate requires that you have access to “accurate” figures for the property’s Net Operating Income.
  • Gross Rent Multiplier or GRM is a ratio that provides a rough estimate of the market value for income producing properties.
  • Debt Coverage Ratio (DCR) or Debt Service Coverage Ratio (DSCR) is a ratio that shows the relationship between net operating income and debt service. It measures an income property’s ability to pay operating expenses and mortgage payments. A DCR of 1 is breakeven. Most lenders require minimum debt coverage ratios of 1.2 or greater. Lenders often use the Before-Tax Cash Flow Model to determine the Debt Coverage Ratio of an income property. This ratio is not exactly a valuation tool of the property itself, but rather an assessment of the properties capacity to generate enough income to pay the mortgage.
  • Loan-to-Value Ratio or LTV is the ratio between the balance of a loan and the appraised value of a property. Lenders will typically require Loan to Value ratios from 70 to 80 percent when purchasing a commercial property.

Rental income is an important income source in preparing self assessments. KVS Accountants based in Fulham are experienced in acting as the rental accountant for many property owners in the areas of Hammersmith, Wimbledon, Shepherd’s Bush, Holland Park and Clapham.  If you are a property owner and concerned about your rental accounting for self assessment purposes, get in touch with KVS Accountants.

 

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