Real Estate Formulas for Financial Success

Payback Ratio

The payback ratio tells an investor how long it will take (in years) for the investor to recapture the original investment. The formula is defined as cash investment divided by annual net cash flow. The initial cash investment is usually the down payment on the property. For example, if an investor put down $40,000 on a property which made $4,000 annually after operating cost it would take 10 years for the investor to recover the original investment.
Equation: Initial Cash Investment/Annual Net Cash Flow

Cash On Cash Return

Cash on cash return can also be referred to as equity dividend yield. Essentially, the cash on cash return metric is the inverse of the payback ratio. If an investment property yields $4,000 in annual cash flow and has a cash investment of $40,000, then it would yield a 10% cash on cash return. This formula is useful when comparing the strength of different investment opportunities to each other.
Equation: Annual Net Cash Flow/Initial Cash Investment

Annual Rate of Return

Annual rate of return is a measure of how well and investment has performed over time. As an investor you can either estimate how well your investment is performing by using the current value of the property, or measure how well your investment performed by using the actual sale price. Keep in mind, it is important to annualize the return to get an accurate assessment on investment performance over time. For example, if an investor held a property for 5 years, with an initial value of $300,000 and the property sold for $400,000, the annual rate of return would be 6.67%. (($400,000 - $300,000) / $300,000) /5 is 0.0667 or 6.67%.
Equation: 100*(Current Value - Initial Value)/Initial Value

Gross Schedule Income

This real estate formula lets you know how much income your property will generate if all units are rented and all payments are made. This can be a useful measure to compare with your actual income. If you had two units rented at a $1,000 per unit the GSI would be $24,000 annually.
Equation: Average Monthly Rent Per Unit * Number of Units * 12

Gross Operating Income (GOI)

Gross income includes both rental income and all other income sources associated with an investment property such as parking fees, laundry and other amenities. Additionally, it takes into account vacancy rates. For example, if you had two units rented for a $1,000 per unit, and charged $50 for a parking spot per month for both units while one unit was empty for 3 months the GOI would be $24,000 - 3,000 + $600 + $600 = $22,200.
Equation: GSI*(100-Vacancy Rate)+ Other Income

Gross Rent Multiplier (GRM)

The price to rent ratio is the purchase price of the property divided by the amount of rent you expect to receive each year before expenses. This formula creates a useful metric to compare several properties to each other. If a property was worth $100,000 and generated $10,000 in rent per year the GRM would be 10. The smaller the number the better.
Equation: (Monthly Rent * Units) * Vacancy Rate *12

Operating Expenses

Operating expenses are costs incurred from operating and maintaining a property. This includes repairs, maintenance, insurance, management fees, utilities, supplies, property taxes, etc. The following are not operating expenses: principal and interest, capital expenditures, depreciation, and income taxes.
Equation: Property Management Fee + Taxes + Insurance + Maintenance + Misc. Cost)*12

Net Operating Income (NOI)

Net Operating Income is equal to a property’s yearly GOI minus the total operating expenses. If a property GOI was $10,000 with expenses being $2,000 annually, the NOI is $8,000.
Equation: GOI-Annual Total Operating Expenses

Net Annual Income (NAI)/ Net Cash Flow

Net Annual Income is NOI minus principal and interest and capital expenditures. This number reflects free cash flow after all expenses have been accounted for. If the NOI is $8,000 and the annual P&I + capital expenditures is $5,000 then the NAI is $3,000.
Equation: NOI - ((Monthly P&I + Cap Ex) *12)

Cap Rate

The cap rate formula compares an investment property’s net operating income with its market value, allowing investors to quickly compare properties to each other. This formula is NOI/ current appraised value of the property. If the NOI is $8,000 and the value of the house is $100,000 the Cap Rate is .08 (8%).
Equation: NOI/Current Value of Property