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









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