Real Estate Investment Formulas

Wealth In Real Estate Investment Formulas:
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Put simply, the cap rate is the net operating income divided by the sales price or value of a property expressed as a percentage. It will help you determine how long it will take to Capitalize your investment based on the Net Operating Income from the property.
For income property held more than one year, investors in a 25% or greater marginal tax bracket will be taxed at a 15% long term capital gains rate and a 25% recapture depreciation tax rate. Investors in a 15% or lower marginal tax bracket will be taxed at a 5% long term capital gains rate and a 15% recapture depreciation tax rate.
Cash on Cash Return is a percentage that measures the return on cash invested in an income producing property. It is calculated by dividing before-tax cash flow by the amount of cash invested and is expressed as a percentage.
Also known as Debt Service Coverage Ratio (DSCR). The debt coverage ratio is a widely used benchmark which measures an income producing property’s ability to cover the monthly mortgage payments. The DCR is calculated by dividing the net operating income (NOI) by a property’s annual debt service.
When purchasing income property, your occupation and role in the management of your property will determine how much you can write off in rental losses each year on your tax return.
Depreciation is the loss in value of an asset / building over time due to wear and tear, physical deterioration and age. The cost of reproducing an income property can be recovered over the useful life of the asset which is determined by law.
Discounted Cash Flows also known as Net Present Value of Discounted Cash Flows is a valuation method which discounts future cash flows back to the present to estimate the attractiveness of a real estate investment.
The Gross Rent Multiplier or GRM is a ratio that is used to estimate the value of income producing properties. The GRM provides a rough estimate of value. Only two pieces of financial information are required to calculate the Gross Rent Multiplier for a property, the sales price and the total gross rents possible.
Appraisers use three different methods to estimate the value of real estate. They are the income approach, the sales comparison approach and the cost approach. The income approach is used to estimate the market value of income producing properties such as office buildings, warehouses, apartment buildings and shopping centers.
The Internal Rate of Return or IRR calculation put simply measures the average annual yield on an investment. For an income producing property, the internal rate of return or IRR calculation uses the initial amount invested in the property, a series of projected cash flows which are usually after-taxes, and a projected After-Tax Sales Proceeds amount in a given year.
The loan-to-value ratio or LTV ratio is calculated by dividing the loan balance of a property by the market value and is expressed as a percentage. For example, a property with a loan balance of $400,000 and a market value of $500,000 has a Loan-to-Value Ratio of 80%.
The Net Income Multiplier or NIM is a factor that is used to estimate the market value of income producing properties. It is equal to the market value of a property divided by the net operating income or NOI.
Net Operating Income or NOI is equal to a property’s yearly gross income less operating expenses. Gross income includes both rental income and other income such as parking fees, laundry and vending receipts, etc. All income associated with a property. Operating expenses are costs incurred during the operation and maintenance of a property.
Operating Expenses are costs associated with the operation and maintenance of an income producing property. Operating Expenses include the following items.
The operating expense ratio also known as the OER is the ratio between the total operating expenses and the effective gross income.
Pyramiding is a technique that maximizes the power of leverage by using the equity in one income property to purchase an additional income property or a larger income property. Most of the real estate in the United States appreciates over time.
What is appreciation? Why do property values go up? Appreciation is the increase in value of a property over time due to inflation, supply and demand, capital improvements and other factors.
For those of you who are new to real estate investment, it is important to have a good understanding of the following tax deductions ( tax write-offs) associated with income producing properties.
The Annual Property Operating Data (APOD) Spreadsheet does many of the formula calculations mentioned above. From a single set of figures you will have at your disposal all of the information you need to make an investment decision.

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