Prudent real estate investors typically will not purchase investment property without first previewing a series of bottom-line numbers that help the investor measure a rental property’s financial performance.
All of which, of course, meant to shed enough light about the property for the investor to make a prudent real estate investing decision.
As a result, a series of real estate investing calculations are made for investment properties in order for the investor to adequately determine a rental property’s cash flow, rate of return, and profitability.
Think of it as a mathematical “tire kicking” of real estate investment property.
Here’s how it works.
When a real estate investor or other real estate professional is evaluating an income producing property, or perhaps comparing several real estate investing opportunities, real estate investing calculations, computed by formula, are made to create financial measures, returns, and ratios that provide real estate investors a “snap shot” of property performance.
Real estate investing calculations cover a broad spectrum, with some requiring little more than a simple math calculation anyone with a pad and pencil can compute over burger and fries, and others, like those involving time value of money, which require a financial calculator or sophisticated real estate investing software.
Our intention here is to acquaint you with – not teach you the formulas for – fifteen real estate investing calculations often made and considered during real estate investment property evaluation. There are a number of other articles on this site we suggest you read to learn the role these calculations play in a real estate analysis along with their formulas.
- Gross Rent Multiplier (GRM)
- Vacancy & Credit Loss
- Net Operating Income (NOI)
- Capitalization Rate
- Annual Debt Service (ADS)
- Cash Flow Before Tax (CFBT)
- Cash on Cash return (C-o-C)
- Loan to Value (LTV)
- Debt Coverage Ratio (DCR)
- Break-Even Ratio (BER)
- Debt Coverage Ratio (DCR)
- Cash Flow After Tax (CFAT)
- Return on Equity (ROE)
- Net Present Value (NPV)
- Internal Rate of Return (IRR)
So You Know
ProAPOD Real Estate Investment Software provides three solutions that each compute these types of calculations automatically.
It should also be pointed out that ProAPOD’s unique real estate investor software solution also includes a feature developed to teach you the formulas.
