Top 21 Real Estate Investing Measures and Formulas
To succeed at real estate investing, it is crucial that you have an understanding and proficiency of financial measures and formulas in order to evaluate investment opportunities correctly.
So to help you better understand real estate investing, I've assembled a list of twenty-one measures and formulas used in real estate investing. Some formulas are omitted because they are complex and would require a financial calculator or real estate investment software to compute.
1. Gross Scheduled Income (GSI) ? This is the total annual income of the property as if all the space were 100% rented and all rent collected. It includes the actual rent generated by occupied units, as well as potential rent from vacant units.
Example: $46,800
2. Vacancy & Credit Loss ? This is potential rental income lost due to unoccupied units or nonpayment of rent by tenants.
Example: $46,800 x .05 = $2,340
3. Gross Operating Income (GOI) ? This is the gross operating income, less vacancy and credit loss, plus income derived from other sources such as coin-operated laundry facilities.
Example: $46,800 ? 2,340 + 720 = $45,180
4. Operating Expenses ? These are the costs associated with keeping a property in service and revenue flowing. This includes property taxes, insurance, utilities, and routine maintenance but does not include debt service, income taxes, or depreciation.
Example: $18,525
5. Net Operating Income (NOI) - Net operating income is one of the most important measures because it represents a return on the purchase price of the property and, in short, expresses an objective measure of a property's income stream. It is the gross operating income, less the operating expenses.
Example: $45,180 ? 18,525 = $26,655
6. Cash Flow before Taxes (CFBT) - Cash flow before taxes is net operating income, less debt service and capital expenditures, plus earned interest. It represents the annual cash available before consideration of income taxes.
Example: $26,655 ? 19,114 = $7,541
7. Taxable Income or Loss ? This is the net operating income, less mortgage interest, real property and capital additions depreciation, amortized loan points and closing costs, plus interest earned on property bank accounts or mortgage escrow accounts. Taxable income may be negative as well as positive. If negative, it can shelter your other earnings and actually result in a negative tax liability.
Example: $1,492
8. Tax Liability (Savings) ? This is what you must pay (or save) in taxes. It's calculated by multiplying the taxable income or loss by the investor's tax bracket.
Example: $1,492 x .28 = $418
9. Cash Flow after Taxes (CFAT) ? This is the amount of spendable cash generated from the property after consideration for taxes. In brief, it's the bottom line, and is calculated by subtracting the tax liability from cash flow before taxes.
Example: $7,541 - 418 = $7,123
10. Gross Rent Multiplier (GRM) ? This provides a simple method you can use to estimate the market value of any income property.
Formula: Price / Gross Scheduled Income = GRM
Example: $360,000 / 46,800 = 7.69
11. Capitalization Rate ? Cap rate (as it's more commonly called) is the rate at which you discount future income to determine its present value.
Formula: NOI / Value = Cap Rate
Example: $26,655 / 360,000 = 7.40%
12. Cash on Cash Return ? This represents the ratio between the property's annual cash flow (usually the first year before taxes) and the amount of the initial capital investment (down payment, loan fees, acquisition costs).
Formula: CFBT / Cash Invested = Cash on Cash
Example: $7,541 / 110,520 = 6.82%
13. Time Value of Money - This is the underlying assumption that money, over time, will change value. For this reason, investment real estate must be studied from a time value of money standpoint because the timing of receipts might be more important than the amount received.
14. Present Value (PV) - This shows what a cash flow or series of cash flows available in the future is worth in purchasing power today. It's calculated by "discounting" future cash flows back in time using a given rate of return (i.e., discount rate).
15. Future Value (FV) - This shows what a cash flow or series of cash flows will be worth at a specified time in the future. It's calculated by "compounding" the original principal sum forward at a given compound rate.
16. Net Present Value (NPV) - This discounts all future cash flows by a desired rate of return to arrive at a present value (PV) of those cash flows, and then deducts it from the investor's initial capital investment. The resulting dollar amount is either negative (return not met), zero (return perfectly met), or positive (return met with room to spare).
17. Internal Rate of Return (IRR) - This model creates a single discount rate whereby all future cash flows can be discounted until they equal the investor's initial investment.
18. Operating Expense Ratio - This provides the ratio of the property's total operating expenses to its gross operating income (GOI).
Formula: Operating Expenses / GOI = Operating Expense Ratio
Example: $18,525 / 45,180 = 41.00%
19. Debt Coverage Ratio (DCR) - This is the ratio between the property's net operating income and annual debt service for the year. Lenders typically require a DCR of 1.2 or more.
Formula: Net Operating Income / Annual Debt Service = Debt Coverage Ratio
Example: $26,655 / 19,114 = 1.39
20. Break-Even Ratio (BER) - This measures the portion of money going out against money coming in, and tells the investor what part of gross operating income will be consumed by all estimated expenses. The result always must be less than 100% for a project to be viable (the lower the better). Lenders typically require a BER of 85% or less.
Formula: (Operating Expense + Debt Service) / Gross Operating Income = BER
Example: ($18,525 + 19,114) / 45,180 = 83.31%
21. Loan to Value (LTV) - This measures what percent of the property's appraised value or selling price (whichever is less) is attributable to financing. A higher LTV means greater leverage (higher financial risk), whereas a lower LTV means less leverage (lower financial risk).
Formula: Loan Amount / Lesser of (Appraised Value or Selling Price) = LTV
Example: $252,000 / 360,000 = 69.22%
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What Are the Most Useful Real Estate Investment Guidelines
Investment real estate is one of the most favourable opportunities of making huge profits. The number of investment opportunities in real estate never slips down and you can always consider it as the best way to invest your hard earned money. However, you should be familiar with real estate investment guidelines to ensure that you are investing at right place, with right people and at right time. These guidelines are of great importance if you are a novice investor in this field. So, here are few guidelines in this direction to make your start.
Proper Research of Real Estate Property
Real Estate Investment Property should be your major concern while understanding the real estate investment guidelines. You should have the flair to evaluate the property on the basis of its market value as well as its future prospects. It doesn?t matter whether you choose commercial or Residential Investment Real Estate. What matters the most is the assessment of future benefits of the property. For this, you must also take into account the location of the property and surrounding facilities like schools, hospitals, shopping areas and others.
How Will You Use the Property?
You must also have the capability to decide what use the property will be put in by you to earn maximum advantages. You can use real estate investment guidelines to decide, whether you will keep the property for your future settlement, or you want to sell it when the prices rise in the future. Also, you can give the property on lease for some duration and earn continuous flow of income.
Investing at Right Time
You must learn Real Estate Investment Guidelines to decide what is the right time for investing money in the real estate? The real estate investment market is prone to fluctuations and thus, you should not end up buying a property at a price higher than its expected market price.
Hiring Best Investment Broker
It is required to hire the services of a good real estate investment broker to make successful investments. You can take into account the past performances of the broker and also his reputation in the market. You can evaluate the proficiency of a real estate broker by asking your questions and measuring his knowledge in the field.
All these real estate investment guidelines can help you in the long run to make considerable profits. You can learn and utilize these guidelines to become an expert investor and add value to your bank balance. A visit to websites such as callowayinvestments.com will further educate you on the subject.
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What Are the Benefits of Owning Rentals for vacation Houses
Vacation rental houses are hot sources of income and are often tagged as cash flow properties. Owning rentals is becoming the preference for a large number of property owners around the world. It is one of the significant ways of earning huge profits. If you are a real estate investor, you can purchase hot vacation houses at different tourist destinations and expect a constant flow of income. You need to be very careful while investing in these properties and end up buying houses in those areas that are visited by tourists throughout the year. Here are few benefits offered by these rental houses.
Earning Money through Accommodation
When Owning Rentals at tourist places like beaches, mountains and other destination, you can use them to offer accommodation to tourists visiting these places. It is an appreciable opportunity for making money and is utilized by people all over the world. These Income Producing Rentals can be purchased at best deals by thoroughly researching the real estate markets of different parts of the region. You can easily recover the money invested by you by leasing your property for vacations in all the seasons.
Better Than Permanent Renting
Vacation rental houses are quite promising as compared to permanent rentals due to many significant reasons. First and foremost, you are saved from worrying about damage to the property, as tourists taking these properties respect them and live there for few days only. Thus, there is no scope for feuds between owners of these rental houses and those living on rent. Also, you can expect more income in this way, as you can put these properties on lease again and again. In this way, owning rentals are eligible ways of opening the doors for income.
Good for Spending Vacations
Another luring aspect of these rental houses is that you can use them for your private vacations as well. This will help you reduce the cost of accommodation and you can have a good time with your friends and family. Owning rentals can also help you organize events like wedding ceremonies, anniversary celebrations and also Christmas and other festival celebrations.
With current prices in the real estate industry, it is the right time for owning rentals and become eligible for earning good profits. You can research well with sites such as callowayinvestments.com to find Real Estate Investment Properties at most rewarding places, which are suitable as tourist destinations.
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Tired of Spending Hours Searching for Free Foreclosure Listings Online?
Announcing the smartest way to search for listings of bank foreclosures, reo real estate and government owned property listings.
Tired of spending hours online trying to find free foreclosure listings only to run into sites requiring expensive monthly memberships?
Search Google for bank owned property, REO homes or any foreclosed , and the results are guaranteed to be realty companies trying to hook people into trial memberships. They provide incomplete listings, and the trial memberships they offer may end up costing hundreds of dollars per year.
It does not require a real estate license, or the need to go through expensive realty sites to find complete, current foreclosure listings directly from the source.
Bank owned homes, mortgage lender property and other REO real estate can be found on the websites of many local, regional and nationwide banks and mortgage lenders. Banks would much rather make money of long-term mortgage payments. The last thing lenders want to do is take responsibility for foreclosed homes.
The Federal Government is another example of a seller who is more than willing to allow
free access to listings its real estate for sale. Tax foreclosures, repossessed and seized homes are all revenue that the IRS is missing out on. Property listings controlled by HUD, Fannie Mae and Freddie Mac are available through Federal Government Databases.
Sandra Jesseph, owner of FindAnyForeclosure offers a downloadable database containing 50 direct links to listings provided by trusted selling institutions. These sites are free to use once you know about them, but hard to find, and they require no membership. “Over the long run, this will completely eliminate the need to ever pay someone else for listings of foreclosed real estate,” says Sandra.
At the end of the day, the agencies in charge of selling these properties are the only places providing completely free listing information. They consider the properties a burden, and are eager to get them off their hands.
Why risk misinformation from third party sources when the official listings are available directly from the seller, at absolutely no cost? Search Bank Foreclosures from FDIC Insured Banking Websites. Search lender owned property through certified private mortgage lenders. Search tax foreclosures and government seized homes through federal databases such as Fannie Mae, Freddie Mac and HUD.
Never be fooled by realty companies offering “free foreclosure listings” again. Thousands of property listings are available directly from the source. No membership, no games, no hidden fees.
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How to Avoid Foreclosure Effectively
Foreclosure is far from the mind of anyone who is just about to sign the mortgage of his very first house or property. But based on the experience of people in the past years, it is always prudent for you to think of ways on how to avoid foreclosure even if you are not having any problems related to this legal process.
Oftentimes, being prepared for whatever eventuality will be of great help when you are already faced with financial problems that can lead to the loss of your house. Below are some of the other things you need to do in order to prevent your lender from seizing your home.
First, you have to face reality. If you are in a situation where you think you won't be able to afford your mortgage payments anymore, you have to think of the options on how to avoid foreclosure. Do not rely on winning the lottery to help you out with your problem. In fact, what you need to do is to contact your lender immediately.
In all the books or articles about dealing with foreclosure, you will see that the first advice is always to coordinate with your bank or mortgage provider. Always keep in mind that banks do not want your home.
They want to get the money that they lent you, so they would be willing to accommodate your requests for loan modification or any other foreclosure assistance programs.
Another important tip on how to avoid foreclosure is by opening or reading the notices or mail sent to you by the lender. You will start receiving such mails after you have started to miss your monthly payment deadlines.
Why do you need to read the notices? For one they have the necessary information about foreclosure avoidance alternatives, even if you are experiencing financial difficulties. Also, these notices contain legal action that you can expect from your lender or bank in case you still continue to default on your payment.
One of the most important pointers on how to avoid foreclosure is to learn about your mortgage rights. It would be advisable if you start reading your loan documents so that you are ready for whatever actions the lender will take in case you do not come up with the money necessary to keep your payments up to date. Moreover, you also have to study foreclosure laws and in your state.
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