Whether you’re a beginner real estate investor or a seasoned professional, you’ve definitely found out that real estate formulas are crucial. Things can get overwhelming at times, as you have to juggle a multitude of different figures, and evaluate which property calculations are relevant to you. Use this quick guide to see all of the real estate math formulas you’ll ever need to use.
Gross Scheduled Income
This real estate formula lets you know how much income your property will generate if all units within it are rented and if there are no defaults in rent payments. This can be a useful measure to compare with your actual income.
Gross Scheduled Income = Rental Income + Lost Rental Income from Vacant Units
Gross Operating Income
This figure reflects the gross operating income in addition to all other sources of income from your rental property. This can include revenue from parking spaces, public vending machines, or others.
Gross Operating Income = (GSI – Lost Rental Income from Vacant Units) + Other Income
Net Operating Income
To use the net operating income formula, you first need to figure out your gross operating income. Once you have that figure, you subtract your operating expenses- things like insurance and maintenance costs. You should note, however, that things like investment property depreciation and interest payments do not factor into operating costs.
Net Operating Income = Gross Operating Income – Total Operating Expenses
The cap rate is one of the most important real estate formulas. The cap rate formula compares an investment property’s net operating income with its market value, allowing investors to quickly compare properties to see which one is most worth it.
Cap Rate = Net Operating Income / Market Value of Property
Cash on Cash Return
Figuring out your cash on cash return is crucial in real estate investing. It’s a widely popular real estate formula since it allows investors to compare investments and evaluate the most profitable one based on the terms of financing.
To use the cash on cash return formula, you simply divide your net operating income by your total cash investment. Typically your total cash investment will include the down payment, closing costs, renovation costs, and any other upfront fees you paid to acquire the investment property. Here is the equation:
Cash on Cash Return = Net Operating Income / Total Cash Investment
Related: What Is a Good Cash on Cash Return?
Equity Build-Up Rate
Smart real estate investments don’t always come in the form of immediate income. Some properties are great investments due to their potential to build equity, therefore becoming more valuable assets in the future. This simple real estate formula can help in measuring these gains. To figure out your equity build-up, divide the mortgage principal paid in your first year by the cash you invested in the first year.
Equity Build-Up Rate = Mortgage Principal Paid (Year 1) / Initial Cash Invested (Year 1)
Price to Rent Ratio
This figure shows you how much rent you’ll be receiving, versus the price at which your property was purchased. This can be useful when comparing residential real estate investments.
Price to Rent Ratio = Purchase Price of Property / Annual Rental Revenue
Price Per Square Foot
Along the same lines, the price per square foot real estate formula can be useful when comparing investments. Savvy investors can use this calculation to evaluate if a rental property is overpriced before it is purchased.
Price Per Square Foot = Market Value of Property / Property Square Footage
Return on Investment
All smart investments are made to reap a return, making this a fundamental real estate formula. Effectively, the return on investment formula allows you to see how much of your initial investment you can recoup annually.
Return on Investment = Annual Returns / Cost of Investment
Cash Flow From Operations
Successful real estate investments will involve more money coming in than going out. You need to subtract your capital expenditures (roughly defined as large expenses that do not reoccur) from your net operating income to figure out your cash flow from operations.
Cash Flow From Operations = Net Operating Income – Capital Expenditures
Cash Flow After Financing
Considering that most real estate investors have borrowed money in order to make their investment, this cash flow formula can provide a more nuanced idea of what your cash flow is like.
Cash Flow After Financing = Cash Flow From Operations – Financing Costs
This figure reflects the time that an investment property is rented out over a period of time. Your occupancy rate is one of the most important indicators of your success, and a low occupancy rate can let you know that action is needed from your end.
Occupancy Rate = Number of Days Occupied / Total Number of Days in One Year
Break Even Ratio
This figure is often used to evaluate risk when making a real estate investment. Too high of a figure when using this real estate formula can indicate that it will be an uphill battle to break even with an investment property and recoup debts.
Break Even Ratio = (Debt Servicing Costs + Operating Expenses) / Gross Operating Income
Gross Rent Multiplier
The gross rent multiplier real estate formula allows investors to figure out the market value of a rental property. This is especially useful when selling a rental property, as it allows you to set the right price the first time. But as well, the savvy investor will figure out the GRM of any property they intend to buy, to figure out if it is a worthwhile investment.
Gross Rent Multiplier = Market Value / Gross Scheduled Income
Debt Service Coverage Ratio
Debt Service Coverage Ratio = Net Operating Income – Annual Debt Service
Is There a Better Way?
Yes! While it’s important to know all of these real estate math formulas, savvy investors will use a real estate investment calculator to streamline their job. Utilizing a reliable service can greatly reduce your stress while greatly increasing the accuracy of your calculations. Advanced software is part of any real estate investment analysis in 2019.
Successful investing depends on the smart decisions of the real estate investor. By taking the time to learn these real estate investment formulas, and knowing the tools available to you, you’re halfway to a successful investment.