How much house can you afford?

Determining the real estate investment size for you should factor in your financial situation, your goals, your leverage options and your risk tolerance; But just knowing how much house you can afford is a simple formula—scroll down for it.

Meantime, here are the steps to take to determine the max price in your buy box:

Assess Your Investible Cash

To assess how much you money you have to invest, start with a review of your financial status, including income, expenses, savings, and debt. Set aside a few months of readily accessible money as an emergency fund. At this point you should have enough clarity to determine the lump-sum you have available to invest, to cover both your cash equity and transaction fees.

Set Your Financial Goal

Know your short-term and long-term financial goals. Short term, consider your investment horizon, the length of time you plan to hold the money in investment. Long term, consider the purpose of your investment, be it earning a living, saving for retirement, or setting up the kids. This sets up your tactical decisions.

See the Leverage you Qualify For

To generate higher returns on their money, real estate investors employ leverage, typically in the form of fix’n’flip loans from a trusted lender like Backflip. Using leverage can triple the amount of money you have to work with, or even more depending on the terms you qualify for. Check what leverage you qualify for today.

Determine Your Risk Tolerance

Assess your risk tolerance. Investments come with varying levels of risk, and it’s essential to align your risk tolerance with your investment strategy. Will you opt for the maximum loan you qualify for, or for less? You can always consult with a Backflip loan expert (for free!) to decide.

Calculate the Size of Your Investment

Now that you know how much cash you have to invest and what amount of leverage you want to use, the basic formula to determine the size of investment you can afford is:

Investment Size = Cash / (1 – Leverage %)

As example, imagine you have $60K cash and qualify for 75% leverage:

Investment Size = $60K / (1 – 75%)

Investment Size = $60K / 25%

Investment Size = $240K

Work with Backflip On an Investment Structure

Now you’ve got your number, you can research different ways to structure your investment to suit you. And bear in mind there are situations where using leverage is not advisable – a good example is land investments that are not producing any cash flow and don’t have a near-term exit strategy. By partnering with Backflip, we’ll help you figure out the optimal structure for your investment plan, so you rest easy knowing you’re getting the best risk-adjusted ROI. Good luck!

Disclaimer: This article is for informational purposes only and is not legal, financial or investment advice. To obtain advice tailored to your particular circumstances, you should consult a licensed professional advisor.