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

 

Real Estate Listing Myths 

All Blogs

Large Agencies Sell Homes Faster – False.

10 years ago, this statement may have been true, but today there is no Data that shows that Large agencies sell homes any faster than smaller agencies, or even faster than For Sale By Owners, all, when on the MLS provide the exact same information to buyers.

Large Agencies have more buyers – False.

Less than 5% of all homes sales were purchased through the company which listed the home. This is a misconception held over from before Real Estate hit the Internet.

If an Agent tells you that they have buyers, simply invite them to bring you one and offer to pay them a buyer Agent Commission.

Real Estate Teams are more productive sellers – False.

Real Estate teams are very common today.  Fact most do not work as a team, they are simply groups of realtors who work under a common “Associate” Broker within an office, they do not work in the traditional definition of a “TEAM” to buy or sell homes.

Real Estate agencies will not show discounted/flat fee listings – False.

Buyer Agents don’t know if the listing side is discounted, the only commission information which is displayed in the listing, is for the buyer agent, which is based on the commission you chose.

Discounted Commission listings receive inferior service – False.

A full-service listing requires the discount listing agent to provide the same full service that any other Full Fee (6%) realtor provides, such as: Arrange Appointments, Accept/Present Offers, Advise on Offers, Assist with counter offers, Negotiate for seller.

Discounted Commission Real Estate Offices cannot survive – False.

Companies that manage expenses and keep overhead low, can significantly reduce commissions and still be profitable.  Large Real Estate companies are burdened with high overhead, such as Expensive Rent, office staff, and utilities, and therefore must charge higher commissions to pay the bills and keep the doors open, they rely on you to pay their expenses and bills.

Zillow is a Home Buying Site – False.

Zillow is a marketing site, less than 5% of the viewers of homes on Zillow are qualified buyers, approximately 80% of the homes you see listed on Zillow were initiated by an MLS listing and were automatically pushed out to Zillow.

Real Estate Listing Myths

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: 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