Real Estate Metrics
I wanted to share a list of the formulas I keep on hand for quick use!
Feel free to comment on the page and let us know any additional metrics YOU are using!
Property Value = Net Operating Income / Capitalization Rate x 100
OR, in the case of a fixer upper;
Property Value= (Net Operating Income / Capitalization Rate) – Repair Cost
Property values can be used to help determine an offer amount.
INCOME FORMULAS (CASH)…
GROSS OPERATING INCOME
Gross Operating Income (GOI)= Gross Scheduled Income – Vacancy Assumption
The GOI reflects the gross annual rental income. The scheduled income is the income we can expect if all of the units are 100% occupied. The vacancy rate assumption can differ depending on the market, however many case studies have typically used ~2%-5%.
NET OPERATING INCOME
Net Operating Income (NOI)= Gross Operating Income – Operating Expenses
The NOI reflects the ability of a property to produce income after operational expenses are paid. NOI is unique to the property vs the investor as it does not include any financing or tax costs, therefore it can be helpful to look at NOI when assessing the value of a property.
Cash Flow= Net Operating Income – Financing Costs
Cash flow, aka the amount of cash you are earning on your investment.
Operating Expenses = Property taxes + Insurance + Property Management + Utilities + Maintenance + Landscaping + Snow Removal + Pest Management + Leasing Commissions + any other service contracts
Mortgage is NOT included in operating expenses because a mortgage does not determine the value of a property as this amount can vary from buyer to buyer.
Annual Return = Income – Expenses – Principal & Interest Payment
Cash on Cash Return = Annual Return / Cash Invested
Total Return= Annual Return / Purchase Price
RETURN RATE RATIOS (% RETURN)…
Capitalization Rate = Net Operating Income / Purchase Price x 100
Your cap rate gives you the rate of return you can expect on your investment based on the income your property generates. “Typical” cap rates differ depending on the area so make sure to find out or calculate the average cap rate for the city in which you are looking to invest, so that you can best assess how a property is performing. For example, in New York City investors can expect a ~3% cap rate, while in upstate New York investors may see cap rates of 10+%.
CASH ON CASH RETURN
Cash on Cash Return = Annual Cash Flow / Cash Investment x 100
This can be used as an initial screening tool to help quickly determine the return you will make on the hard cash you plan to invest.
DEBT SERVICE COVERAGE RATIO
Debt Service Coverage Ratio= Net Operating Income / Debt Service
The bank typically requires 1.25x minimum debt coverage, meaning your income covers 1.25x of your expected debt.
LOAN TO VALUE
Loan to Value (LTV) = Loan Amount / Value of the Property
Another metric a lender will assess in order to determine how much $$$ to loan against the property.