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on the dollar.
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Top Real Estate Financial Calculator Problems Explained
Real estate investors use a variety of mathematical tools to analyze the performance of their investment properties. We've taken some of the most popular ones and explain their purpose and how to do these real estate investment calculations.
1. GROSS POTENTIAL INCOME:
This one is relatively simple. We want to know what income will be realized if a property is fully occupied and all rents are collected. We take number of units times annual rent for a total.
Example: An apartment complex with six units. Three rent for $700 per month and the other three rent for $800 per month.
- 3 units*$700/month=$2100
- 3 units*$800/month=$2400
- $25,200+$28,800=$54,000 Annual income. This is our GPI. Remember that we are assuming full occupancy and all payments are made.
2. Gross Rental Multiplier
Though not the most precise of tools, the GRM can give you a quick comparison tool to decide on whether to do a more thorough analysis.
How to Calculate and use the Gross Rent MUltiplier (GRM)
As I work with real estate investors, I do quite a few market value analysis for each property finally purchased. The Gross Rental Multiplier (GRM) is easy to calculate, but isn't a very precise tool for ascertaining value. However, it is an excellent first quick value assessment tool to see if further more detailed analysis is warranted. In other words, if the GRM is way out high or low compared to recent comparable sold properties, it probably indicates a problem with the property or gross over-pricing.
2. Estimating value of property based on GRM:
Let's say that you did an analysis of recent comparable sold properties and found that, like the one above, their GRM's averaged around 6.75. Now you want to approximate the value of the property being considered for purchase. You know that its gross rental income is $68,000 annually.
GRM X Annual Income = Market Value
6.75 X $68,000 = $459,000
If it's listed for sale at $695,000, you might not want to waste more time in looking at it for purchase.
1. Getting the GRM for recent sold properties:
Market Value/Annual Gross Income=Gross Rent Multiplier (GRM)
Property sold for $750,000/$110,000 Annual Income=GRM of 6.82
How To Calculate Break-Even Ratio for Real Estate Investment
Lenders use the break-even ratio as one of their analysis methods when considering providing financing for a real estate investment property. Too high of a break-even ratio is a cautionary indicator.
1. Determine the debt service for the property: In this case we'll assume an annual debt service of $32,000.
2. Determine the annual operating expenses for the property.
In this case, we'll assume that management and direct operating costs annually are $47,000.
3. Calculate the annual gross operating income of the property. We'll assume a gross operating income of $98,000 annually.
4. Add Debt Service to Operating Expenses and divide by Operating Income:
$32,000 + $47,000 / $98,000= .81