Understanding Investment Calculations and Formulas
Real Estate Investing, Appraisals and Absorption Rate
Real estate investors do a lot of number crunching, and that's a good thing. Learn why you should add absorption rate to your real estate investing toolbox.
Rental Property Operating Expenses and Cash Flow
If you're considering investing in real estate rental property, be sure that you understand the way that expenses and income are calculated and discussed. Operating expenses is one area of misunderstanding.
A Run Through How a Rental Property Can Provide Financial Returns
Each of the items below will show you a financial facet of owning a rental property. We are using a fourplex as our example property. All of the examples below will be based on these facts:
The Mortgage Interest Deduction for a Rental Property
In our series examining a fourplex rental property's income and taxes, we're now looking at the mortgage interest deduction. This is frequently one of the largest write-offs for the owner.
Depreciating Your Real Estate Rental Property
One of the advantages of owning rental real estate is tax deductions that can offset income from operations of that property as well as others in some cases. Here's how depreciation works on a rental property.
An Example Rental Property Cash Flow Calculation
Many a wealthy person got that way with real estate. A smart buy on a rental property and good management can provide cash flow for other uses or investments. Here's a fourplex example.
How to Calculate Rental Yield for the Real Estate Investor - With Spreadsheets
Many believe that consistently better returns on investment can be realized in real estate investment rental property than can be gained in stocks or bonds investments. The start of the process is an accurate estimate of rental yield for a property. See how to calculate it here.
Property Tax Equalization for the Real Estate Investor
Real estate property taxation sometimes involves an equalization factor. This is used to bring the assessed tax values of certain properties into line with surrounding areas. Astute real estate investors may run into this, as they are choosing properties with upside appreciation potential in areas that haven't "taken off" yet.
How to Calculate Mortgage Interest for the Real Estate Investor
When a new loan is involved in a real estate closing, mortgage interest is included in the prepaids portion of the HUD-1 settlement statement. The buyer prepays interest to the lender, because interest is paid in arrears, and the interest must be brought current to the date of the first payment.
Assumed Mortgage Interest Proration for the Real Estate Investor
When real estate investors assume a mortgage loan from the seller, there must be a proration of the mortgage interest due. As mortgage interest is paid in arrears, the seller will owe the buyer for the interest accrued to or through the closing date, but will be paid by the buyer with the next mortgage payment.
Prorating an Assumed Insurance Policy for the Real Estate Investor
In some cases, the hazard or other insurance policy will be assumed by the buyer of a real estate investment property. When this occurs, the amount of the premium paid in advance, but unused at the time of closing, will have to be prorated. This is money the buyer owes the seller for the remaining policy coverage period.
Prorating Rent for the Real Estate Investor
In real estate investing, many purchases are for rental property. Prorating rent for the closing statement is of interest to all. Here's the how to of prorating rent.
Real Estate Financial Calculator Problems Explained w/Spreadsheet
A spreadsheet real estate financial calculator solution. Set up to quickly calculate gross potential income, gross operating income, gross rent multiplier, net operating income, cash flow before taxes, cash flow after taxes, break-even ratio and return on equity.
Calculate Return on Equity in Subsequent Years of a Real Estate Investment
After the first year, or as a projection for future years, a real estate investor might want to calculate their return on equity for years after the first. This could be to determine if the return still justifies holding the property when it has appreciated in value and the mortgage has been paid down significantly.
Calculate Return on Equity for Real Estate Investments in First Year
Return on equity, as calculated in the first year of a real estate investment, is the cash return after taxes divided by the cash invested in the property.
The Break-Even Ratio - How to Calculate and Use It
The break-even ratio of a real estate investment is the total of the debt service and operating expenses divided by the gross operating income. It is expressed as a percentage, the lower the better when lenders are looking at a deal.
Break Even Ratio Definition
The break even ratio is used by lenders to assess risk in lending on an investment property.
Calculate the Loan to Value (LTV) Ratio of a Real Estate Property
When working with real estate clients, agents and brokers are frequently tasked to help buyers to determine what they can afford in a home. One of the factors is the size of the mortgage they can get. The loan to value ratio is the percentage of a property's value that is mortgaged. Lenders will make mortgages based on maximum loan to value for different types of properties.
Calculate Cash Flow After Taxes (CFAT) for Your Real Estate Investor Clients
Once the cash flow before taxes is calculated (learn how here), we can then subtract the tax liability for the resulting real estate investment property cash flow after taxes.
Calculate Cash Flow Before Taxes (CFBT) for Your Real Estate Investor Clients
Cash flow is all the in and out flows of cash through a business, without regard to tax considerations. All money in or out is considered. The cash flow of a real estate investment is an important part of its viability as an investment.
Calculate Net Operating Income for a Real Estate Investment Property
Net operating income is the monetary result of subtracting operating expenses from Gross Operating Income. Gross operating income is that income after deductions for vacancy and credit loss.
Calculate Capitalization Rate for Real Estate
For an income property that sold recently, you would divide the net operating income by the sold price to determine the capitalization rate. This percentage number could then be used to determine the value of another property if you know it's net income.
Calculate Compound Interest
Compound interest is interest on principal plus interest on the accumulated interest.
Calculate and Use the Gross Rental Multiplier (GRM)
Gross Rent Multiplier (GRM) is a tool used to assess the approximate value of a rental property by comparing its rental income with other like properties.
Calculate Gross Operating Income (G0I)
In real estate investment, we want to estimate the income of a property with a realistic estimate of losses due to vacancy and bad credit. We subtract those estimated amounts from Gross Projected Income to arrive at Gross Operating Income.
Calculate Gross Potential (GPI) Income
This is an easy calculation of the expected gross revenues from an income property. For rentals, the monthly or annual rents for all the units is totaled. No losses for vacancy or non-payment are considered. In other words, the property is considered fully occupied with all payments collected.
Calculate Percentage of Profit
When a property is purchased and resold at a profit, this calculation will yield the percentage of profit based on purchase price.
Determine an Income Property's Value Using Capitalization Rate
If the net operating income of a property is known, and it is divided by the capitalization rate for similar properties, the approximate current value of the property will be determined.
Help Your Client Justify an Income Property Purchase Price Using Cap Rate
Using the asking price of an income producing property and the capitalization rate of other similar properties in the area, one can calculate the income necessary to justify the asking price.
Calculate Simple Interest
The formula and method for the calculation of simple interest. Used frequently by those in real estate investing.
Calculate Vacancy and Credit Loss in Real Estate Investing
Vacancy and credit loss is the estimated dollar amount of lost rental income due to vacant units and non-payment of rent.
Valuation of Income Properties Using Cap Rate for the Real Estate Agent
Capitalization rate is a common method used in the process of arriving at the value of an income property, such as rental units, commercial rental space, etc. Learn the calculations you'll need as a real estate agent to work with your investor clients.
Property Transfer Taxes - Calculations for the Real Estate Investor
The calculation methods and tax rates for property transfer taxes vary significantly by state. However, some basic methods prevail. Learn here how rates are calculated, whether full selling price is used, cash at closing or assumed mortgage deducted.
Comparing S&P Case-Shiller & FHFA Home Price Indexes - 1 Year Chart
Which home price index do you follow? If you're basing decisions on it, you should be aware of the differences in the S&P Case-Shiller and the FHFA Home Price Indexes. Charting 1 year here.