Basic Terms in Real Estate Investing and Formulas

Knowing how to estimate properties and creating an exact picture of your investments is a necessary element for Real Estate Investor

As we all know, real estate can be a very profitable way to earn more money, there are multiple way to ease your risk and increase your probability of a successful investment. There are some definitive ways of calculation that will help you to take decision whether to continue on investment or not

The two most result that a real estate investor should look for is Cash Flow and Equity

     Cash Flow –  It determines the Income and Expenses.

     Equity    –  It determines what you purchased the property for compared to what it's full value is. (Discounted Purchase).

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.

Rental Income (actual)
plus Vacant Units (at market rent)
= Gross Scheduled Income

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.

Gross Scheduled Income
less Vacancy and Credit Loss
plus Other Income
= Gross Operating Income 

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.

Gross Operating Income
less Operating Expenses
= Net Operating Income

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.

Net Operating Income
less Debt Service
less Capital Expenditures
= Cash Flow Before Tax

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.

Market Value
÷ Gross Scheduled Income
= Gross Rent Multiplier

Then,

Gross Scheduled Income
x Gross Rent Multiplier
= Market Value

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.

Net Operating Income
÷ Market Value
= Cap Rate

Or,

Net Operating Income
÷ Cap rate
= Market Value

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.

Cash Flow Before Taxes
÷ Initial Capital Investment
= Cash on Cash Return

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.

Operating Expenses
÷ Gross Operating Income
= Operating Expense Ratio

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).

Net Operating Income
÷ Debt Service
= Debt Coverage Ratio

DCR results:

• Less than 1.0 - not enough NOI to cover the debt
• Exactly 1.0 - just enough NOI to cover the debt
• Greater than 1.0 - more than enough NOI to cover the debt

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.

(Operating Expense + Debt Service)
÷ Gross Operating Income
= Break-Even Ratio

BER results:

• Less than 100% - expenses consuming less than available income
• Greater than 100% - expenses consuming more than available income

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.

Loan Amount
÷ Lesser of Appraised Value or Selling Price
= Loan to Value

See More: Basic Real Estate Investing