Real estate investing requires an insight and proficiency of at least a handful of financial measures and formulas, otherwise venture opportunities can't be evaluated correctly, and venture money can be lost.
So to help you best understand real estate investing, I've assembled a list of twenty-one measures and formulas used in real estate investing. Some formulas are omitted because they are involved and would wish a financial calculator or real estate venture software to compute.
1. Gross Scheduled revenue (Gsi)
This is the total every year revenue of the asset as if all the space were 100% rented and all rent collected. It includes the actual rent generated by occupied units, as well as possible rent from vacant units.
Example: ,800
2. Vacancy & prestige Loss
This is possible rental revenue lost due to unoccupied units or nonpayment of rent by tenants.
Example: ,800 x .05 = ,340
3. Gross Operating revenue (Goi)
This is the gross operating income, less vacancy and prestige loss, plus revenue derived from other sources such as coin-operated laundry facilities.
Example: ,800 - 2,340 + 720 = ,180
4. Operating Expenses
These are the costs related with holding a asset in aid and revenue flowing. This includes asset taxes, insurance, utilities, and routine maintenance but does not contain debt service, revenue taxes, or depreciation.
Example: ,525
5. Net Operating revenue (Noi)
Net operating revenue is one of the most prominent measures because it represents a return on the buy price of the asset and, in short, expresses an objective portion of a property's revenue stream. It is the gross operating income, less the operating expenses.
Example: ,180 - 18,525 = ,655
6. Cash Flow before Taxes (Cfbt)
Cash flow before taxes is net operating income, less debt aid and capital expenditures, plus earned interest. It represents the every year cash ready before notice of revenue taxes.
Example: ,655 - 19,114 = ,541
7. Dutible revenue or Loss
This is the net operating income, less mortgage interest, real asset and capital additions depreciation, amortized loan points and closing costs, plus interest earned on asset bank accounts or mortgage escrow accounts. Dutible revenue may be negative as well as positive. If negative, it can shelter your other revenue and indeed corollary in a negative tax liability.
Example: ,492
8. Tax Liability (Savings)
This is what you must pay (or save) in taxes. It's calculated by multiplying the Dutible revenue or loss by the investor's tax bracket.
Example: ,492 x .28 = 8
9. Cash Flow after Taxes (Cfat)
This is the estimate of spendable cash generated from the asset after notice for taxes. In brief, it's the bottom line, and is calculated by subtracting the tax liability from cash flow before taxes.
Example: ,541 - 418 = ,123
10. Gross Rent Multiplier (Grm)
This provides a easy recipe you can use to evaluation the market value of any revenue property.
Formula: Price / Gross Scheduled revenue = Gross Rent Multiplier
Example: 0,000 / 46,800 = 7.69
11. Capitalization Rate
Cap rate (as it's more commonly called) is the rate at which you discount hereafter revenue to conclude its gift value.
Formula: Net Operating revenue / Value = Cap Rate
Example: ,655 / 360,000 = 7.40%
12. Cash on Cash Return
This represents the ratio in the middle of the property's every year cash flow (usually the first year before taxes) and the estimate of the introductory capital venture (down payment, loan fees, acquisition costs).
Formula: Cash Flow before Tax / Cash Invested = Cash on Cash Return
Example: ,541 / 110,520 = 6.82%
13. Time Value of Money
This is the basic assumption that money, over time, will change value. For this reason, venture real estate must be studied from a time value of money standpoint because the timing of receipts might be more prominent than the estimate received.
14. gift Value (Pv)
This shows what a cash flow or series of cash flows ready in the hereafter is worth in purchasing power today. It's calculated by "discounting" hereafter cash flows back in time using a given rate of return (i.e., discount rate).
15. hereafter Value (Fv)
This shows what a cash flow or series of cash flows will be worth at a specified time in the future. It's calculated by "compounding" the original indispensable sum transmit at a given aggregate rate.
16. Net gift Value (Npv)
This discounts all hereafter cash flows by a desired rate of return to arrive at a gift value (Pv) of those cash flows, and then deducts it from the investor's introductory capital investment. The resulting dollar estimate is either negative (return not met), zero (return perfectly met), or determined (return met with room to spare).
17. Internal Rate of Return (Irr)
This model creates a singular discount rate whereby all hereafter cash flows can be discounted until they equal the investor's introductory investment.
18. Operating expense Ratio
This provides the ratio of the property's total operating expenses to its gross operating revenue (Goi).
Formula: Operating Expenses / Gross Operating revenue = Operating expense Ratio
Example: ,525 / 45,180 = 41.00%
19. Debt Coverage Ratio (Dcr)
This is the ratio in the middle of the property's net operating revenue and every year debt aid for the year. Lenders typically wish a Dcr of 1.2 or more.
Formula: Net Operating revenue / every year Debt aid = Debt Coverage Ratio
Example: ,655 / 19,114 = 1.39
20. Break-Even Ratio (Ber)
This measures the portion of money going out against money arrival in, and tells the investor what part of gross operating revenue will be consumed by all estimated expenses. The corollary all the time must be less than 100% for a task to be viable (the lower the better). Lenders typically wish a Ber of 85% or less.
Formula: (Operating expense + Debt Service) / Gross Operating revenue = Break-even Ratio
Example: (,525 + 19,114) / 45,180 = 83.31%
21. Loan to Value (Ltv)
This measures what percent of the property's appraised value or selling price (whichever is less) is attributable to financing. A higher Ltv means greater leverage (higher financial risk), whereas a lower Ltv means less leverage (lower financial risk).
Formula: Loan estimate / Lesser of Appraised Value or Selling Price = Loan to Value
Example: 2,000 / 360,000 = 69.22%
Top 21 Real Estate Investing Measures & Formulas