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Top 21 Real Estate Analysis Measures & Formulas

# Top 21 Real Estate Analysis Measures & Formulas

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Read this comprehensive list of twenty-one key definitions and formulas used extensively in real estate analysis. A must-have resource for anyone involved with real estate investing.
Read this comprehensive list of twenty-one key definitions and formulas used extensively in real estate analysis. A must-have resource for anyone involved with real estate investing.

Published by: James R Kobzeff on Nov 20, 2008

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PROAPOD
®Real Estate Investment Softwarewww.proapod.com
Top 21 Real Estate Analysis Measures & Formulas
James R Kobzeff
Real estate investing requires an understanding and proficiency of at least a handful of financialmeasures and formulas, otherwise investment opportunities can't be evaluated correctly, andinvestment money can be lost.So to help you better understand real estate investing, I've assembled a list of twenty-one measuresand formulas used in real estate investing. Some formulas are omitted because they are complexand would require a financial calculator or real estate investment software to compute.
1. Gross Scheduled Income (GSI) –
This is the total annual income of the property as if all thespace were 100% rented and all rent collected. It includes the actual rent generated by occupiedunits, as well as potential rent from vacant units.Example: \$46,800
2. Vacancy & Credit Loss
– This is potential rental income lost due to unoccupied units or nonpayment of rent by tenants.Example: \$46,800 x .05 = \$2,340
3. Gross Operating Income (GOI)
– This is the gross operating income, less vacancy and creditloss, plus income derived from other sources such as coin-operated laundry facilities.Example: \$46,800 – 2,340 + 720 = \$45,180
4. Operating Expenses
– These are the costs associated with keeping a property in service andrevenue flowing. This includes property taxes, insurance, utilities, and routine maintenance butdoes not include debt service, income taxes, or depreciation.Example: \$18,525
5. Net Operating Income (NOI)
- Net operating income is one of the most important measures because it represents a return on the purchase price of the property and, in short, expresses anobjective measure of a property's income stream. It is the gross operating income, less theoperating expenses.Example: \$45,180 – 18,525 = \$26,655
6. Cash Flow before Taxes (CFBT)
- Cash flow before taxes is net operating income, less debtservice and capital expenditures, plus earned interest. It represents the annual cash available beforeconsideration of income taxes.

Example: \$26,655 – 19,114 = \$7,541
7. Taxable Income or Loss
– This is the net operating income, less mortgage interest, real propertyand capital additions depreciation, amortized loan points and closing costs, plus interest earned on property bank accounts or mortgage escrow accounts. Taxable income may be negative as well as positive. If negative, it can shelter your other earnings and actually result in a negative tax liability.Example: \$1,492
8. Tax Liability (Savings)
– This is what you must pay (or save) in taxes. It's calculated bymultiplying the taxable income or loss by the investor's tax bracket.Example: \$1,492 x .28 = \$418
9. Cash Flow after Taxes (CFAT)
– This is the amount of spendable cash generated from the property after consideration for taxes. In brief, it's the bottom line, and is calculated by subtractingthe tax liability from cash flow before taxes.Example: \$7,541 - 418 = \$7,123
10. Gross Rent Multiplier (GRM)
– This provides a simple method you can use to estimate themarket value of any income property.Formula: Price / Gross Scheduled Income = GRMExample: \$360,000 / 46,800 = 7.69
11. Capitalization Rate
– Cap rate (as it's more commonly called) is the rate at which youdiscount future income to determine its present value.Formula: NOI / Value = Cap RateExample: \$26,655 / 360,000 = 7.40%
12. Cash on Cash Return
– This represents the ratio between the property's annual cash flow(usually the first year before taxes) and the amount of the initial capital investment (down payment,loan fees, acquisition costs).Formula: CFBT / Cash Invested = Cash on CashExample: \$7,541 / 110,520 = 6.82%
13. Time Value of Money
- This is the underlying assumption that money, over time, will changevalue. For this reason, investment real estate must be studied from a time value of moneystandpoint because the timing of receipts might be more important than the amount received.
14. Present Value (PV)
- This shows what a cash flow or series of cash flows available in thefuture is worth in purchasing power today. It's calculated by "discounting" future cash flows back in time using a given rate of return (i.e., discount rate).

15. Future Value (FV)
- This shows what a cash flow or series of cash flows will be worth at aspecified time in the future. It's calculated by "compounding" the original principal sum forward ata given compound rate.
16. Net Present Value (NPV)
- This discounts all future cash flows by a desired rate of return toarrive at a present value (PV) of those cash flows, and then deducts it from the investor's initialcapital investment. The resulting dollar amount is either negative (return not met), zero (return perfectly met), or positive (return met with room to spare).
17. Internal Rate of Return (IRR)
- This model creates a single discount rate whereby all futurecash flows can be discounted until they equal the investor's initial investment.
18. Operating Expense Ratio
- This provides the ratio of the property's total operating expenses toits gross operating income (GOI).Formula: Operating Expenses / GOI = Operating Expense RatioExample: \$18,525 / 45,180 = 41.00%
19. Debt Coverage Ratio (DCR
) - This is the ratio between the property's net operating incomeand annual debt service for the year. Lenders typically require a DCR of 1.2 or more.Formula: Net Operating Income / Annual Debt Service = Debt Coverage RatioExample: \$26,655 / 19,114 = 1.39
20. Break-Even Ratio (BER)
- This measures the portion of money going out against moneycoming in, and tells the investor what part of gross operating income will be consumed by allestimated expenses. The result always must be less than 100% for a project to be viable (the lower the better). Lenders typically require a BER of 85% or less.Formula: (Operating Expense + Debt Service) / Gross Operating Income = BER Example: (\$18,525 + 19,114) / 45,180 = 83.31%
21. Loan to Value (LTV)
- This measures what percent of the property's appraised value or selling price (whichever is less) is attributable to financing. A higher LTV means greater leverage (higher financial risk), whereas a lower LTV means less leverage (lower financial risk).Formula: Loan Amount / Lesser of (Appraised Value or Selling Price) = LTVExample: \$252,000 / 360,000 = 69.22%