Real Estate Formulas Investors Need To Know

Rule Of 72
Number of years to double in value = 72 / Rate of Growth (rate of return)

Gross Rent Multiplier (GRM)
Gross Rent Multiplier = Market Value / Gross Scheduled Income (annual)

Gross Scheduled Income (Potential Gross Income)
Total Annual Rent + Total Potential Rent For Properties That Are Vacant

Gross Operating Income
Gross Scheduled Income – Vacancies and Credit Loss = Gross Operating Income

Net Operating Income(NOI)
Gross OperatingIncome – Annual Operating Expenses = NOI. This does NOT include debt service. Loan payments, depreciation and capital improvements are NOT operating expenses. Repairs and any expense incurred to operate the property are operating expenses including insurance, repairs, advertising, property taxes, trash, water, utilities, property management fees, legal, accounting, landscaping etc.

Cap Rate (capitalization rate)
Annual Net Operating Income(net income not gross income) divided by the cost to purchase the property. Formula can be expressed three different ways

• Cap Rate = NOI / Cost
• Cost x Cap Rate = NOI
• Cost = NOI / Cap Rate

Cost of Capital (cost of money)
Your borrowing cost to borrow capital to purchase real estate. Hard money = 15% cost of capital. Using your credit line = 2% cost of capital. Borrowing from family could be 0%

Cash on Cash Return
Cash on Cash Return = Annual Cash Flow/Cash Invested

Cash Flow
Net Operating Income – Debt Service – Capital Additions= Cash Flow (should be positive)