If you’re going to win in the world of real estate investing you are going to need to be well informed. You will need to be able to quickly and effectively assess what a property is worth. In order to do this, there are some well-known equations that you’ll want to calculate as you assess the property. Here are some of the commonly used real estate equations.
Gross Scheduled Rents (GSI)
GSI = Total Monthly Rents x # Units x 12 Months
Pro Forma GSI
Pro forma GSI = Total Monthly FUTURE MARKET Rents x # Units x 12 Months
NOTE: Pro Forma GSI is an estimation of what the rents will be. You cannot count on this number as nobody can predict the future. Especially be cautious of the seller giving you the pro forma rents. They will tend to see the future through rose colored glasses.
Vacant units/total number of units.
Net Operating Income (NOI)
Total Income – Expenses = NOI
NOTE: Mortgage payments are not considered expenses in this equation. Neither are capital improvements or income taxes.
Expense Ratio = 1 – (NOI/GSI)
NOI – Debt Service = Cash Flow
Capitalization Rate (CAP Rate)
NOI/price = CAP Rate
Typically the newer the property the lower the CAP rate will be.
Gross Rent Multiplier (GRM)
Purchase Price/Monthly Rent = Gross Rent Multiplier
Cash on Cash Return (CoC)
CoC = Cash Flow (before taxes)/Initial Capital Investment
This measures the income earned based on the cash invested in the property. For example:
Purchase price: $1,000,000
Cash Down payment: $200,000
Cash Flow: $20,000
CoC = 10%
I hope these equations are helpful for you as you calculate out your deals. Averages for CAP rates, CoC, and vacancy rates etc. will always vary depending on the economy and current real estate market. It’s hard to say what a “good” CAP rate is because it will fluctuate with the market. However, no matter what the market is, these equations will allow you to compare rental properties in your current market to see which one is the best deal for you or your company.