The I:E Ratio – The Most Important Number in Property Investing

The I:E Ratio – The Most Important Number in Property Investing

If you tell me the I:E ratio on your deal, I can tell you how risky it is. The I:E ratio is nothing but representation of the income versus the expenses on a monthly basis on a property. It tells me how likely you are to get into trouble if the property market turns.

Let’s say that my income on a property is £1000 a month, my expenses are £900 a month. If you look at the I:E ratio it’s going to be 1000/9 or if we divide those 2 numbers, it becomes 1.11111… reoccurring. What the I:E ratio tells me is that if you have 1 month where you have no tenant then you’re breaking even and if you have 2 months where you don’t have a tenant then you’re losing money.

Is it a good investment?

The I:E ratio tells us roughly how many months you could go without having income to break-even, but it doesn’t tell me if the investment is good or not. The only way I can do that is by comparing I:E ratios 2 or more deals. When I’m looking to invest, I’m looking to analyze the I:E ratio on as many deals as I can because the higher the ratio, the safer the investment.

If I have a deal where my income is £1000 and all my expenses, including my mortgage, are only £400 that’s a safe investment. The I:E ratio here is 2 and of course 2 is bigger than 1.11. I can tell you that the ratio of 2 deal is safer than an I:E ratio of 1.1 because guess what – I can have many more months with no income and still make money or my expenses could go up and I would still make money.

The fundamental formula

If you’re not looking to make cash flow on a monthly basis, is the I:E ratio is relevant? Some investors are looking to make money quickly and buy a property at £750,000 and sell at £1,500,000. That’s what they want to do but success in property, I keep on saying, is down to long term management.

Long term management success is down to money on a monthly basis and that means you need a good I:E ratio. So, for me the I:E ratio is the fundamental ratio or formula that I look at on my investments.

Is it a good deal?

But, an I:E ratio of 2 doesn’t tell me it’s a good deal, I need more information other than just the I:E ratio because an I:E ratio of 2 might mean to say that I only make a return on investment (ROI) of 12% but another deal with an I:E ratio of 2, I could be making an ROI of 50% so I have to take more into consideration but of course, the I:E ratio is one of the first things that I look at on an investment – is it higher than two? How easy is it to find an I:E ratio deal of 2 in the world right now? It’s not easy. Most investors are happy with 1.1 and many investors I know are happy with less than 1. That means each month they are paying money into their properties from their own pocket which is crazy.

For me, I won’t invest unless I get a very good I:E ratio. Sometimes I’ll accept 1.5 if the market is at a low point sometimes, I need to accept 2.5 – 3 if the markets at a high point, and these kinds of things based on the market trends are important to understand. Let me tell you some of the ratios as I found recently in places you wouldn’t expect to find those I:E ratios.

What to expect worldwide

In the UK, we found an I:E ratio of 3.65 now that might sound crazy, that means that the income on the property is 3.6 times the expenses on a monthly basis on that property. In Dubai where people again expect to have a very small I:E ratio of maybe 1.1 maybe 1.2 if they’re lucky, we’re looking at 1.8 – 1.9 and in America, wow, that’s the land of I:E ratios, we’ve seen I:E ratios as high as 5 and even as high as 5.5 in some areas.

So, if you want to be a safer or you want to have safer investments and be a safer investor look at the I:E ratio and choose properties with high I:E ratios because you can withstand the ups and downs on a longer term and that guarantees you’ll make money.

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About Sunil

After building a multi-million pound portfolio in the UK, he realised that he could add more value to the lives of people by helping them think out of the box, giving them knowledge and confidence to make intelligent decisions.

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