Happy New Year! One of my goals for this decade is to add at least 5 investment properties to my portfolio. If investing in real estate is one of your goals, this blog post will help you get your feet wet. I wanted to include a couple of the important formulas you should know in order to easily evaluate your investments.
Purpose: Estimates an investor's potential return on property & gives a measure to compare like-properties.
cap rate = net operating income / price of the property
Gross Scheduled Income
Purpose: Maximum potential income without regard to any possible vacancies/credit losses
GSI = rental income + lost rental income from vacant units
Gross Operating Income
Purpose: Reflects the annual rental income collected from occupied units & other income sources on the property
GOI = (GSI- vacancy losses) + other income
Net Operating Income
Purpose: Analyzes an income producing property's profitability before adding in costs from taxes or financing
NOI = GOI - total expenses
Cash on Cash Return
Purpose: Gives a more accurate assessment on investment's performance since it measures your returns based on actual cash invested. Important calculation for purchases made with long term borrowing.
cash on cash return = NOI/ total cash investment
or = cash flow/ cash in deal
Equity Build Up Rate
Purpose: Analyses investment's potential to build equity. Usually used in junction with cash on cash to get a better picture of investment.
equity build up rate = mortgage principal paid (yr 1) / initial cash invested (yr 1)
Return on Investment
Purpose: Allows investors an idea of how much they can recoup of their investment annually
ROI = annual returns / cost of investment
Cash Flow from Operations
Purpose: To give snapshot of what cash flow looks like in your investment. Goal is to have more money coming in than going out.
cash flow from operations = NOI - capital expenditures
Cash Flow After Financing
Purpose: Takes financing costs into consideration, since most investments are financed.
cash flow after financing = cash flow from operations - financing costs
Break Even Ratio
Purpose: Gives you an idea of how easy it will be to recoup your expenses. Measures risk. Too high of a ratio & you may not have a great investment on your hands.
break even = (debt servicing costs +operating expenses) / gross operating income
Investing in real estate is something I am extremely passionate about. It may seem daunting at first, but I would love to help! Together we can talk through what your goals are & the best way to achieve them.
Thanks & Gig 'Em!