Real estate math calculations are essential to the success of any real estate investor or professional. These calculations help determine the value of a property, the profitability of a real estate investment, and the potential return on investment. In this article, we will discuss six of the most common real estate math calculations and how to use them. Have suggestions for additional calculations we should cover in the future? If so, comment below, we’d like to hear what you’d like to learn about!
- Net Operating Income (NOI): NOI is a calculation used to determine the income generated by a property after deducting all operating expenses, including property taxes, insurance, maintenance, and management fees. Please note: This formula does not include debt service (principal + interest) as an operating expense. The formula for calculating NOI is:
NOI = Gross Rental Income – Operating Expenses
- Capitalization Rate (Cap Rate): Cap rate is a metric used to determine the potential return on investment for a property. It is calculated by dividing the net operating income by the property’s value. The formula for calculating cap rate is:
Cap Rate = NOI / Property Value
- Gross Rent Multiplier (GRM): GRM is a calculation used to determine how long it would take for the property to pay for itself. A lower number is better, as this indicates a quicker pay-off. It is calculated by dividing the property’s value by its gross annual rental income. The formula for calculating GRM is:
GRM = Property Value / Gross Annual Rental Income
- Cash-on-Cash Return (CoC): CoC is a calculation used to determine the cash return on investment for a property. It is calculated by dividing the annual cash flow (total annual income – total annual expenses (including debt service this time!)) by the total investment. The formula for calculating CoC is:
CoC = Annual Cash Flow / Total Investment
- Debt Service Coverage Ratio (DSCR): DSCR is a calculation used to determine the ability of a property to generate enough income to cover its debt obligations. It is calculated by dividing the property’s net operating income by its debt service. The formula for calculating DSCR is:
DSCR = Net Operating Income / Debt Service
- Loan-to-Value Ratio (LTV): LTV is a calculation used to determine the amount of a property’s value that is financed by a loan. It is calculated by dividing the loan amount by the property’s value. The formula for calculating LTV is:
LTV = Loan Amount / Property Value
These are just a few of the most common real estate math calculations used in the industry. By understanding these formulas and how to use them, investors and professionals can make more informed decisions about the potential profitability of a real estate investment. It is important to note that these calculations should be used in conjunction with other market research and analysis to ensure accurate valuations and projections.
