Real estate investing can be a complex and challenging field, but there are a number of formulas and calculations that can help investors make informed decisions. Indianapolis is home to a large market of multifamily and single family rentals that investors have flocked to the last few years for the affordable prices. Here are some of the most commonly used real estate investing formulas:
Cash-on-cash Return
This formula calculates the cash flow generated by a rental property by dividing the annual cash flow by the initial cash investment. It’s a quick and easy way to determine the return on investment (ROI) for a rental property. Quick example.
Capitalization Rate (Cap rate)
This formula calculates the rate of return on a rental property based on the property’s net operating income and the current market value. It’s a useful way to compare the potential return on different properties.
Gross Rent Multiplier (GRM)
This formula calculates the value of a rental property by dividing the price of the property by the gross annual rental income. It’s a quick and easy way to compare the value of different properties.
Debt Service Coverage Ratio (DSCR)
This formula calculates the ability of a rental property to cover its debt payments by dividing the net operating income by the total debt payments. It’s used to determine the risk of a rental property and to evaluate the potential for cash flow.
Net Operating Income (NOI)
This formula calculates the net income of a rental property after operating expenses have been taken into account. It’s a useful way to determine the potential cash flow of a rental property.
Return on Equity (ROE)
This formula calculates the return on an investment in a rental property based on the property’s net operating income and the equity invested. It’s a useful way to compare the potential return on different properties.
Price-to-rent ratio
This formula compares the purchase price of a property to the annual rent it can generate. It’s used to determine if a property is over or under valued.
Internal Rate of Return (IRR)
It’s a calculation that shows the percentage return of an investment over time. It’s used to determine the profitability of a real estate investment over a period of time.
Conclusion
It’s important to keep in mind that these formulas are only a starting point, and that many other factors must be taken into account when making investment decisions. It’s advisable to consult with a real estate expert or financial advisor to help you understand and use these formulas correctly.
Overall, these formulas are commonly used tools in real estate investing and can be helpful when evaluating potential investment opportunities. By understanding these formulas and how to use them, investors can make better-informed decisions and increase their chances of success. Do you know someone looking to buy their first real estate investment property? Let me know!