Investment Formulas You Should Know

Posted by Alexis Knox on Saturday, January 4th, 2020 at 8:18pm

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. 

 

CAP Rate

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!

Alexis Knox

Realtor, CHMS

cell: 281.745.0010

email: Alexis@TM5Properties.com

 

 

 

 

Sources:

https://www.investopedia.com/terms/c/capitalizationrate.asp

https://www.zilculator.com/real-estate-analysis/gross-scheduled-income-formula-excel-example

https://www.investopedia.com/terms/n/noi.asp

 

https://www.investopedia.com/terms/c/cashoncashreturn.asp

https://www.mashvisor.com/blog/real-estate-formulas-beginner/

https://www.biggerpockets.com/blog/2016-01-13-top-8-real-estate-calculations

 

 

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