Simple, But Required Real Estate Calculations Every Investor Should Know!!

THE THREE COMMON REAL ESTATE INVESTING CALCULATIONS

Crunching the numbers can be one of the most difficult part of the financial due diligence on a property. However, it is important to know what you are getting into financially.
The following key terms are the most important figures you will need to calculate to determine if a property is right for you.

Net Operating Income (NOI):
The net operating income or NOI is the dollar amount that’s left over after you collect all your income (rent) and pay out you operating expenses. This amount is what is used to pay the mortgage, and what’s left after the mortgage payment goes into your pocket! Here is the equation:

Net Operating Income = effective gross income – operating expenses

What is effective gross income? Your effective gross income is the net amount of income after vacancies with the property.

What are operating expenses? Your operating expenses of the property include taxes, insurance, utilities, management fees, payroll, landscaping, maintenance, supplies, and repairs.

Cash-on cash Return:

The cash-on-cash return measures how long it takes for you down payment to come back to you. For example, if your down payment was $20,000 on a property how soon would your monthly cash flow (NOI – Debt Payments) it takes to add up to $20,000. General real estate guidelines suggest that a 10% or greater cash-on-cash return is preferred.

Capitalization Rate or Cap Rate:
The capitalization rate is a measure of a property’s performance without considering the mortgage financing. If you paid all cash for the investment, how much money would it make? What’s the return on your cash outlay? Cap rate is a standard used industry wide.

Cap Rate = net operating income / sales price

Since a cap rate measures the property’s profitability it can also help you determine the appropriate sales price for the property. For example, let’s say you want to earn at least 10% on your property investments. The property you are currently evaluating is listed at $2,750,000 and has a $250,000 NOI. Well for you to earn 10% on your money, you would want to negotiate a purchase price of $2,500,000 ($250,000 / 10%).