Real Estate Formulas for Investors

There is more to real estate investment than the property itself. A few decisions need to be made before you purchase the property. You will need to know certain calculations to make the right decision.

The Question you should ask yourself first; Are you holding the property as a rental or are you going to rehab it and flip the property?

Remember, your profit is usually determined when you buy the property, not when it sells. This means, if you buy the property for the right price, you will receive the profit margins predicted.

Using a Realtor, you can get help with some of the information you will need to complete the formulas or double check the numbers. Websites like Zillow and other public sites offer FREE VALUATION but can provide inaccurate information.

Gross Scheduled Income

The Gross Scheduled Income Formula presents the amount of 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 against actual income.

Talk with your Realtor to view comparable rentals in the area. Many investors guess the rental amount or set the amount catered towards a return on investment. However, rental comps are as crucial as sales comps for marketing the property, You want to be conservative in your calculations while testing the cap in the market of your property’s location.

Real Estate Formula:

Gross Scheduled Income = Rental Income + Lost Rental Income from Vacant Units

Gross Operating Income

Gross Operating Income reflects the total income generated by an asset including additional sources of income from your rental property. A few examples would be revenue generated from parking spaces, laundry, and vending machines

Real Estate Formula:

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 operating expenses from costs like insurance and maintenance fees.

Please note, amounts like property depreciation and interest payments do not factor into operating costs. 

Real Estate Formula:

Net Operating Income = Gross Operating Income – Total Operating Expenses

Capitalization Rate

An important formula for an investor to know is the Cap Rate. The cap rate formula compares an investment property’s net operating income against the market value, allowing investors to quickly compare property profitability.

Real Estate Formula:

Cap Rate = Net Operating Income / Market Value of Property

Cash on Cash Return

Determining your Cash on Cash Return is crucial in real estate investing. It’s widely utilized since it allows investors to compare investments and evaluate profitability. A spreadsheet is a great way to view side-by-side comparisons between properties that are similar. By setting up a spreadsheet with formulas, you can quickly calculate income and expenses to estimate returns.

To use the cash on cash return formula, you simply divide the 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 up-front fees you paid to acquire the investment property.

Real Estate Formula:

Cash on Cash Return = Net Operating Income / Total Cash Investment

Equity Build-Up Rate

Smart real estate investments do not always come in the form of immediate income. Some properties are sought after 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.

Consulting with a Realtor is a good way to see how quickly an area is growing in value.

Real Estate Formula:

Equity Build-Up Rate = Mortgage Principal Paid (Year 1) / Initial Cash Invested (Year 1)

Price to Rent Ratio 

This figure shows projected rental income, versus the price a property was purchased for. This is useful when comparing residential real estate investments. Like other calculations, a spreadsheet with formulas can assist with quicker decisions.

Real Estate Formula:

Price to Rent Ratio = Purchase Price of Property / Annual Rental Revenue

Price Per Square Foot

The price per square foot formula proves useful when quickly comparing multiple properties. Savvy investors can use this calculation to evaluate if a rental property is overpriced before it is purchased. Your Realtor can help you evaluate this in depth by pulling both rental and sales comps, which list the price per square foot (as-is, not post-rehab).

Real Estate Formula:

Price Per Square Foot = Market Value of Property / Property Square Footage

Return on Investment

The return on investment formula allows you to calculate how much of your initial investment can be recovered annually.

Real Estate Formula:

Return on Investment = Annual Returns / Cost of Investment

Cash Flow From Operations

Successful real estate investments should require 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 determine cash flow from operations.

Real Estate Formula:

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 purchase their investment, this cash flow formula can provide a better idea of what your cash flow is like after financing

Real Estate Formula:

Cash Flow After Financing = Cash Flow From Operations – Financing Costs

Occupancy Rate

Occupancy Rate reflects the time that an investment property is rented out or vacant over a period of time. Your occupancy rate is an important indicator of success, and a low occupancy rate can let you know that action is needed from your end.

Low occupancy can occur when properties are in need of repair. People tend to seek alternative housing if a landlord is not maintaining the property or did not complete some repairs required previously. Landlords can “promise” to fix things to get people to move in, while in turn causing them to move out as fast.

Real Estate Formula:

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 purchasing a real estate investment. Too high of a ration can indicate an up-hill battle to break even with an investment property and recoup debts.

Real Estate Formula:

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 helps set the right price without wasting days on market.

You will want to compare notes with a Realtor. This calculation can help set the value based on the numbers, but it is always good to have a second pair of eyes.

Real Estate Formula:

Gross Rent Multiplier = Market Value / Gross Scheduled Income

Debt Service Coverage Ratio

This real estate formula can be used to figure out the current cash flow you have available to recoup the debt which financed your investment.

Real Estate Formula:

Debt Service Coverage Ratio = Net Operating Income – Annual Debt Service

 

Real Estate Formulas for Investors

Joseph Walter Realty

 

If you have a question about buying or selling your home, please reach out to Joseph Walter Realty at 248-294-7849 or via email at info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

 

All Blogs

 

What is a Real Estate Appraisal?

All Blogs

What is an Appraisal?

If you have bought or sold your own personal residence, investment, or commercial property; you have probably dealt with the appraisal process.

Real estate appraisal, property valuation or land valuation is the process of developing an opinion of property value based on market statistics and property data

Appraisal reports form the basis for mortgage loans, settling estates and divorces, taxation, and so on.

As the seller or selling agent, even with the most up to date information, appraisals can come in with unexpected values.

Buyers cannot chose the appraisal company or the appraiser they use (I will not say that this is 100% of the time, but in most cases where a loan is involved, the buyer will be hands off and should remain hands off).

An appraisal is a safety net for the bank and the buyer. The bank needs to protect its loan with a piece of real estate at a specific loan to value.

Value

The location also plays a key role in valuation. However, since property cannot change location, it is often the upgrades or improvements to the home that can change its value.

Renegotiating the deal after the appraisal can be a struggle. Even through it was offered, the bank will not accept something lower and most of the time the buyer is not willing to come to the table with more money than the home is currently worth.

Buyers and their agents should also do their homework to make sure the offer they are submitting matches the value of homes in the area.

Sellers and listing agents should have comps ready to go in case the appraisal comes back lower than offer price.

You can submit these comps to the appraisal company to fight the appraisal. The more comparables shared, the higher the chance of an appraisal adjustment.

Although in my opinion there is a better chance at winning the lottery, than getting appraisers to adjust their report.

 

If you have a question about buying or selling your home, please reach out to Joseph Walter Realtyat 248-294-7849 or via email: info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

Michigan Licensed Broker 6505431020
Ohio Licensed Broker 2020008974
Florida Licensed Broker BK3491231
Texas Licensed Broker 9010704
Arkansas Licensed Broker PB00090741
Georgia Licensed Broker 79028

More states 2021


3275 Martin Parkway, Ste. 125, Walled Lake, MI 48390

what is an appraisal

 

 

 

Home Valuation

All Blogs

Establishing a Value For Your Real Estate

As a For Sale by Owner, how are you establishing the sale price of your home? Are you using Zillow? Listening to Uncle Joe? What process are you using to determine the value your home?

Establishing the sales price of your home is especially important to getting your home sold.

Valuation Tools

Free Valuation Sites

There are many FREE online tools and websites that offer “guestimates” on value, but many times they are not completely accurate.

Web estimates often times present comps that are outside the specific market. There are many factors at play when establishing a homes value.

Professional Valuation

Realtors

Most Realtors offer a home valuation. It is good to note that the majority of realtors are not licensed appraisers. Realtors give a generally close estimate to the market value of the home. 

Real estate professionals access active, pending and sold data from the MLS to refine property value. Finding comparable homes in the area and analyzing the differences between them.

Appraisers

An appraiser typical uses the MLS in the same way Realtors do for home valuation. The difference being, an appraiser is licensed for the sole purpose of valuation. They find more data and will inspect the home for maximum detail.

An appraisal is usually ordered by the buyer’s lender and has the power to cap your sales price.

Home Valuation Tips

Avoid Overpricing

Overpriced homes generally receive little to no showings and waste days on market, along with seller continued holding costs. Keep in mind that buyers will have full, detailed access to market activity through their agent.

Sell Quickly

Yes, days on market can negatively affect the value of the offers, Realtors know that high days on market is an indication to offer low. High Days on market can then produce offers that are “low-ball” since they see that you have been on the market for a while.

Get Help

As a For Sale by Owner we would suggest you call a Realtor or Broker. Pay them to run a report for you, do a full Comparative Market Analysis, or Broker Price Opinion. This could run you as little as $100 to as much as $300, but it is worth it.

For Sale by Owner can be a formidable task and there are many more moving pieces than expected. It can be frustrating and exciting at the same time. The goal may be to save hard-earned equity, but do not hesitate to seek a real estate professional’s assistance.

Property Updates

If you have recently updated your home, the full value of the improvements may not be returned in equity. Many upgrades you perform on a home increase the desirability, but not the value. Desirability may differentiate you from comparable properties in person, but on paper they hold little weight. 

Be especially careful about hiring Family members or friends to sell your home, your home is one of your largest assets, go with a proven professional not a part time agent.

 

List Your Property

Service Coverage

 

Home Valuation

If you have a question about buying or selling your home, please reach out to Joseph Walter Realty at 248-294-7849 or via email: info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

All Blogs