Top 21 Real Estate Investing Measures & Formulas
Real estate investing requires an understanding and
proficiency of at least a handful of financial measures and
formulas, otherwise investment opportunities can’t be
evaluated correctly, and investment money can be lost.
So to help you better understand real estate investing,
I’ve assembled a list of twenty-one measures and formulas
used by investors. Some formulas are omitted because they
require a financial calculator or investment real estate
software to compute.
1. Gross Scheduled Income (GSI) - This is the total annual
income of the property as if all the space were 100% rented
and all rent collected. It includes the actual rent
generated by occupied units, as well as potential rent from
vacant units.
Example: $46,800
2. Vacancy & Credit Loss - This is potential rental income
lost due to unoccupied units or nonpayment of rent by
tenants.
Example: $46,800 x .05 = $2,340
3. Gross Operating Income (GOI) - This is the gross
operating income, less vacancy and credit loss, plus income
derived from other sources such as coin-operated laundry
facilities.
Example: $46,800 - 2,340 + 720 = $45,180
4. Operating Expenses - These are the costs associated with
keeping a property in service and revenue flowing. This
includes property taxes, insurance, utilities, and routine
maintenance but does not include debt service, income
taxes, or depreciation.
Example: $18,525
5. Net Operating Income (NOI) - Net operating income is one
of the most important measures because it represents a
return on the purchase price of the property and, in short,
expresses an objective measure of a property’s income
stream. It is the gross operating income, less the
operating expenses.
Example: $45,180 - 18,525 = $26,655
6. Cash Flow before Taxes (CFBT) - Cash flow before taxes
is net operating income, less debt service and capital
expenditures, plus earned interest. It represents the
annual cash available before consideration of income taxes.
Example: $26,655 - 19,114 = $7,541
7. Taxable Income or Loss - This is the net operating
income, less mortgage interest, real property and capital
additions depreciation, amortized loan points and closing
costs, plus interest earned on property bank accounts or
mortgage escrow accounts. Taxable income may be negative as
well as positive. If negative, it can shelter your other
earnings and actually result in a negative tax liability.
Example: $1,492
8. Tax Liability (Savings) - This is what you must pay (or
save) in taxes. It’s calculated by multiplying the taxable
income or loss by the investor’s tax bracket.
Example: $1,492 x .28 = $418
9. Cash Flow after Taxes (CFAT) - This is the amount of
spendable cash generated from the property after
consideration for taxes. In brief, it’s the bottom line,
and is calculated by subtracting the tax liability from
cash flow before taxes.
Example: $7,541 - 418 = $7,123
10. Gross Rent Multiplier (GRM) - This provides a simple
method you can use to estimate the market value of any
income property.
Formula: Price / Gross Scheduled Income = GRM
Example: $360,000 / 46,800 = 7.69
11. Capitalization Rate - Cap rate (as it’s more commonly
called) is the rate at which you discount future income to
determine its present value.
Formula: Net Operating Income / Value = Cap Rate
Example: $26,655 / 360,000 = 7.40%
12. Cash on Cash Return - This represents the ratio between
the property’s annual cash flow (usually the first year
before taxes) and the amount of the initial capital
investment (down payment, loan fees, acquisition costs).
Formula: Cash Flow before Taxes / Cash Invested = Cash on
Cash
Example: $7,541 / 110,520 = 6.82%
13. Time Value of Money - This is the underlying assumption
that money, over time, will change value. For this reason,
investment real estate must be studied from a time value of
money standpoint because the timing of receipts might be
more important than the amount received.
14. Present Value (PV) - This shows what a cash flow or
series of cash flows available in the future is worth in
purchasing power today. It’s calculated by “discounting”
future cash flows back in time using a given rate of return
(i.e., discount rate).
15. Future 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
principal sum forward at a given compound rate.
16. Net Present Value (NPV) - This discounts all future
cash flows by a desired rate of return to arrive at a
present value (PV) of those cash flows, and then deducts it
from the investor’s initial capital investment. The
resulting dollar amount is either negative (return not
met), zero (return perfectly met), or positive (return met
with room to spare).
17. Internal Rate of Return (IRR) - This model creates a
single discount rate whereby all future cash flows can be
discounted until they equal the investor’s initial
investment.
18. Operating Expense Ratio - This provides the ratio of
the property’s total operating expenses to its gross
operating income (GOI).
Formula: Operating Expenses / Gross Operating Income =
Operating Expense Ratio
Example: $18,525 / 45,180 = 41.00%
19. Debt Coverage Ratio (DCR) - This is the ratio between
the property’s net operating income and annual debt service
for the year. Lenders typically require a DCR of 1.2 or
more.
Formula: Net Operating Income / Annual Debt Service = Debt
Coverage Ratio
Example: $26,655 / 19,114 = 1.39
20. Break-Even Ratio (BER) - This measures the portion of
money going out against money coming in, and tells the
investor what part of gross operating income will be
consumed by all estimated expenses. The result always must
be less than 100% for a project to be viable (the lower the
better). Lenders typically require a BER of 85% or less.
Formula: (Operating Expense + Debt Service) / Gross
Operating Income = BER
Example: ($18,525 + 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 Amount / Lesser of Appraised Value or
Selling Price = LTV
Example: $252,000 / 360,000 = 69.22%
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James Kobzeff is the developer of ProAPOD - leading
investment real estate software. Create a cash flow
analysis presentation with all the measures and formulas
discussed in this article in minutes!
See how at ProApod.com
