The beauty behind real estate investing lies in the math, planning, and decision-making process. You must understand the numbers to score a beautiful property and receive lucrative profits. Doing so allows you to better understand if the investment is worth it.
While it may seem intimidating, the math behind real estate investing is simple. At Val-Chris Investments, we want to help simplify the numbers to help you get the hang of calculating them. Below are four calculations every real estate investor should know, whether you’re looking to buy, sell, or invest.
NOI ÷ Purchase Price = Cap Rate
Determine the capitalization rate, or “cap rate,” by comparing recently sold prices to similar properties and operating incomes. You will apply this calculation to your desired property to verify the current value. This calculation is a tool to help you determine if the property is worth the asking price. Commercial and residential investors and lenders typically use cap rates to compare competitive markets. Doing so can help them map what businesses and other amenities can help boost profits.
Debt Service + Annual Operating Expenses – Money for Reserves ÷ Annual Gross Operating Income = Breakeven
Another important calculation every real estate investor should know is the breakeven ratio. After investing time and money into an operation, you would like to know the possibilities of profit. With this calculation, you can predict when you can pay off your property and expenses. While all deals, terms, and property conditions vary, you should shoot for a ratio under 85 percent.
Net Operating Income (NOI)
Operating Income – Operating Expenses = NOI
Your NOI is the income left over after calculating your operations expenses before your debt services—which is essential for the lender. This calculation is important because it influences your budget. Your net operation income includes your gross income, maintenance and repair costs, insurance, and more.
Gross Operating Income (GOI)
Potential Gross Income – Vacancy Loss – Credit Loss = GOI
You should know this equation to calculate the expenses you lose due to vacant units while marketing for new tenants. This calculation also includes maintenance, repairs, renovations, and new management costs. Your vacancy expense should be less than ten percent of your gross rental income. If you still need to, reevaluate your budget and property. Doing so allows you to make a profit from your renovations.
At Val-Chris, we strive for our partners to come out on top. While investing can seem intimidating, we’re here to help. We have a team of trust deed investing experts ready to join your team. Interested? Connect with us today!