Residential & Multi-Family Investing
If you have extra cash and want to diversify your portfolio with real estate investment, welcome. Contemplating about investing and not sure where to begin, you’re at the right place. I will walk you through investing terminologies, formulas, and calculations to introduce you to the language of investing. Or if you’re a seasoned investor and looking for upside opportunities or buyer Return on Investment (ROI) analysis/comparison or leveraging, this page is for you as well.
Common definitions and calculations that every investor should understand.
Common Area Maintenance
Capitalization Rate. Rate of Return on sales price: N.O.I. divided by sales price
N.O.I. subtract debt service
N.O.I. divided by debt service. Most lenders required this ratio to be at least 1.25.
Sales price X 85% divided by 27.5
Tenant signs statement stating that no verbal agreements exist between tenant and landlord applying to lease agreement.
35% of G.O.I.
Gross Operating Income: S.G.I. less vacancy
Gross Rent Multiplier – Annualized Rents/Income
Sales price divided by S.G.I.
*typically, the lower the GRM, the better because it means your rental property will take less time to pay off its price. Good range is 4 to 7.
N.O.I divided by Debt Coverage Ratio (DCR)
Tenant pays taxes, insurance, maintenance & utilities for operating a property
Net Operating Income: S.G.I. less vacancy and expenses
Tenant pays agreed-to-percent of gross sales volume over agreed—to base sales volume
Return on Equity: Return on value of property less balances.
Cash Flow divided by Equity
Return on Investment (ROI): Rate of return on down payment. Cash flow divided by down payment. Also, known as Cash on cash.
Scheduled Gross Income; Income before vacancy & expenses
Tenant pays increase on real property taxes
5% of S.G.I.
N.O.I. divided by Cap Rate
G.S.I. x G.R.M.
A Simple & Quick Way to Analyze Rental Properties Using Cash on Cash ROI
Quick methods to determine if a property is worth buying or what price would make sense to purchase. This will give you Cash on Cash ROI return.
Simple Back of the Envelope Analysis
Your rental goals might be to get financial independence, build wealth and live off the income. These formulas analyze the rental properties to measure income and equity without using a calculator, tool, or computer. You need to use these approaches together to determine if the property is a good investment. Ultimately, accomplishing your financial goals.
Gross Rent Multiplier = Sales Price divided by Total Annual Rent.
The lower the number the better at producing income. You can use this number to compare properties. Not all properties meet the 1% rule.
The One Percent Rule – Rule of thumb or a shortcut or a starting point for early analysis of a property using GRM; a measurement of how good a property is at producing rental income.
Monthly Gross Rent >= 1% Sales Price (including repairs; all in costs)
Using Capitalization Rate or Cap Rate is more in-depth and accurate than the 1% Rule. The cap rate is used for all-cash transactions. The higher the cap rate, the better the return.
NOI divided by Sales Price (including repairs/total costs)
NIAF – Net Income After Financing
NIAF = NOI minus Financing costs
NIAF divided by Down Payment (includes repairs & closing costs)
4 Wealth Generators in Real Estate
The combination of these produce the return on your investment.
N.O.I. subtract debt service
Extra money coming in on a rental property. The return on the cash flow.
In addition to deductions, your income (cash flow) is tax differently from regular income.
The value of the property goes up over time.
When the debt service is paid, the equity is added to your return on your investment.
4 Ways to Increase Equity
4 Ways to Increase Net Operating Income (NOI): Forced Appreciation
Putting It All Together
- GRM –> 1% Rule
- Cap Rate
- C on C
- Current Discount
- Potential Value Increase
CAP Rates - Why They Don't Really Matter
5 Major Downfalls of a Cap Rate Valuation
Cap Rate = NOI divided by Total Sales Price
The cap rates are one of the most widely used commercial metrics for real estate investing and real estate investment analysis. They help to give the benchmark for the property valuation. Nevertheless, they should not be used solely because they don’t take into account other really important factors.