Real Estate Math Made Easy: 10 Formulas for Successful Investments
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Real estate math and calculations are at the heart of successful real estate investing decisions.
In this video we show you the 10 must-know real estate math formulas for buying profitable investment properties:
Real Estate Math Formula #1: Net Operating Income (NOI)
The net operating income is the amount of money left from your rental income when you deduct your rental operating expenses and before you pay your debt.
Real Estate Math Formula #2: Capitalization Rate (Cap Rate)
The cap rate is the ratio of the net operating income divided by the property's sale price.
A good cap rate on rental investment properties is 8-12%.
Real Estate Math Formula #3: Rent to Cost Ratio
The rent to cost ratio is calculated by dividing the monthly rental rate by the total property cost including the sale's price and the renovation costs.
According to the 1% rule, the monthly rental income of an investment property must equal or exceed 1% of the total purchase price in order to generate positive cash flow.
Real Estate Math Formula #4: Gross Rent Multiplier (GRM)
The gross rent multiplier is calculated as the ratio of the total acquisition value of the investment property including renovations and the annual gross rental income.
Real Estate Math Formula #5: Debt Service Coverage Ratio (DSCR)
The debt service coverage ratio equals the net operating income divided by the debt service.
The DSCR is used to determine if an investment property generates enough rental income to afford the mortgage.
Real Estate Math Formula #6: Break-Even Ratio
The break-even ratio equals the sum of the operating expenses and the debt service divided by the rental property gross income.
To break even on a real estate investment, you should aim for a break-even ratio of 85% or less.
This means that your rental property expenses can increase by 15% or your operating income by drop by 15%, and you will still be able to break even on your investment property.
Real Estate Math Formula #7: Cash on Cash Return (CoC Return)
The cash on cash return in real estate is calculated by dividing the cash flow before taxes by the total cash invested.
The cash on cash return is one of the most important formulas for evaluating real estate investments as it shows profit while taking into consideration the method of financing.
Real Estate Math Formula #8: Price per Square Foot (PSF)
To calculate the price per square foot, divide the sale price of the investment property by the total square footage.
Real Estate Math Formula #9: 50% Rule
According to the 50% rule, the total expenses on your rental property should equal 50% of the gross income.
Real Estate Math Formula #10: 70% Rule
Based on the 70% rule in real estate investing, the maximum price you pay for a property that you plan to flip should equal 70% of the after-repair value minus the cost of rehabilitation and remodeling.
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