All formulations are annualized based off of ANNUAL AMOUNTS.
Basic Formula's
1. Gross Scheduled Income (GSI)
GSI is the annual rental income a property would generate if 100% of all space were rented and all rents collected. If vacant units do exist at the time of your real estate analysis then include them at their reasonable market rent.
2. Gross Operating Income (GOI)
GOI is gross scheduled income less vacancy and credit loss plus income derived from other sources such as coin-operated laundry facilities. Consider GOI as the amount of rental income the real estate investor actually collects to service the rental property.
3. Operating Expenses
Operating expenses include those costs associated with keeping a property operational and in service. These include property taxes, insurance, utilities, and routine maintenance. They do not include payments made for mortgages, capital expenditures or income taxes.
4. Net Operating Income (NOI)
NOI is a property's income after being reduced by vacancy and credit loss and all operating expenses. NOI is one of the most important calculations to any real estate investment because it represents the income stream that subsequently determines the property's market value – that is, the price a real estate investor is willing to pay for that income stream.
5. Cash Flow Before Tax (CFBT)
CFBT is the number of dollars a property generates in a given year after all expenses but in turn still subject to the real estate investor's income tax liability.
6. Gross Rent Multiplier (GRM)
GRM is a simple method used by analysts to determine a rental income property's market value based upon its gross scheduled income. You would first calculate the GRM using the market value at which other properties sold, and then apply that GRM to determine the market value for your own property.
Then,
7. Cap Rate
This popular return expresses the ratio between a rental property's value and its net operating income. The cap rate formula commonly serves two useful real estate investing purposes: To calculate a property's cap rate, or by transposing the formula, to calculate a property's reasonable estimate of value.
Or,
The cap rate formula is simple:
Net Operating Income / Value = Cap Rate
You can also turn this formula around to calculate any of the other variables.
Want to know what you should pay for a property?
Net Operating Income / Cap Rate = ValueCurious what your net income will be?
Value x Cap Rate = Net Operating Income
8. Cash on Cash Return (CoC)
CoC is the ratio between a property's cash flow in a given year and the amount of initial capital investment required to make the acquisition (e.g., mortgage down payment and closing costs). Most investors usually look at cash-on-cash as it relates to cash flow before taxes during the first year of ownership.9. Operating Expense Ratio (OER)
OER expresses the ratio (as a percentage) between a real estate investment's total operating expenses dollar amount to its gross operating income dollar amount.
10. Debt Coverage Ratio (DCR)
DCR is a ratio that expresses the number of times annual net operating income exceeds debt service (i.e., total loan payment, including both principal and interest).
DCR results:
11. Break-Even Ratio (BER)
BER is a ratio some lenders calculate to gauge the proportion between the money going out to the money coming so they can estimate how vulnerable a property is to defaulting on its debt if rental income declines. BER reveals the percent of income consumed by the estimated expenses.
BER results:
12. Loan to Value (LTV)
LTV measures what percentage of a property's appraised value or selling price (whichever is less) is attributable to financing. A higher LTV benefits real estate investors with greater leverage, whereas lenders regard a higher LTV as a greater financial risk.
Advanced Formula's
13. Annual Depreciation Allowance
Annual depreciation allowance is the amount of tax deduction allowed by the tax code that investment property owners may take each year until the entire depreciable asset is written off.
Then,
14. Mid-Month Convention
For instance, if you buy in January, you will only get to write off 11.5 months of depreciation for that first year of ownership. Likewise, say you sell in January, then you will only get to writeoff half-month depreciation for that final year of ownership.
15. Taxable Income
Taxable income is the amount of revenue produced by a rental on which the owner must pay Federal income tax. Once calculated, that amount is multiplied by the investor's marginal tax rate (i.e., state and federal combined) to arrive at the owner's tax liability.
Then,16. Cash Flow After Tax (CFAT)
CFAT is the amount of spendable cash that the real estate investor makes from the investment after satisfying all required tax obligations.
17. Time Value of Money
Time value of money is the underlying assumption that money, over time, will change value. It's an important element in real estate investing because it could suggest that the timing of receipts from the investment might be more important than the amount received.
18. Present Value (PV)
PV shows what a cash flow or series of cash flows available in the future is worth in today's dollars. PV is calculated by "discounting" future cash flows back in time using a given "discount rate".
19. Future Value (FV)
FV shows what a cash flow or series of cash flows will be worth at a specified time in the future. FV is calculated by "compounding" the original principal sum forward in time at a given "compound rate".20. Net Present Value (NPV)
NPV shows the dollar amount difference between the present value of all future cash flows using a particular discount rate – your required rate of return – and the initial cash invested to purchase those cash flows.
NPV results:
21. Internal Rate of Return (IRR)
This popular model creates a single discount rate whereby all future cash flows can be discounted until they equal the investor's initial cash investment. In other words, when a series of all future cash flows is discounted at IRR that present value amount will equal the actual cash investment amount.
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