Investing in real estate is definitely one of the wisest places to put one’s money. However, since all kinds of financial investments are subject to market risks, it is mandatory that one gets all possible knowledge behind the calculations that go on in this regard. Ali Ata an experienced individual in the field of financial growth, therefore, comes to the fore with his knowledge to reveal the various types of calculations one can expect in the real estate investment.
The following are the various calculations that are commonly carried out in the investments of real estate.
- Net Operating Income (NOI) – in simple words this is the difference between the operating income and the operating expenses. This is an elaborate consideration of the gross income, the expenses which include the insurance, taxes, repair, and management of the property. However, the mortgage payments and the capital expenses are excluded in this form of calculation.
- Capitalization Rate – also known as the cap rate is calculated by dividing the NOI by the purchase price. Debt as a variable is eliminated while calculating the returns one can get on the property. Offices, industries, and the likes use this form of calculation for comparison purposes.
- Rent to Cost Ratio – when the monthly rent is divided by the total rent cost, the result got is the ratio of the two. This is the means of verifying the 1% rule, which states that the ratio of the rent and cost should be a minimum of 1 %.
- Gross Rental Multiplier (GRM) – a knowledgeable Ali Ata in real estate investing endorses that it is vital to know this kind of calculation as well although it could be interchangeably used for rent to cost ratio. This is calculated by the division of the total property cost with the gross annual rent.
- Debt Service Coverage Ratio (DSCR) – the net operating income is divided by the debt service in this. Dent Coverage Ratio is the other name by which this is known and is employed in the determination of the loan paying capacity of a property. It is said that the DSCR count needs to be 1.2 for it to qualify as a property that has the capability to repay a loan.
- Break-even Ratio – a calculation method commonly known, says Ali Ata, in which the operating expenses and the debt services are added and then divided by the gross income. This is the means of understanding the rate at which the gross can come down and yet keep the cash flow positive.
- Cash on cash return – the result of the division of cash flow before taxes and the cash invested is what helps one understand how much cash can be received on cash return.
Apart from the above mentioned some other commonly used methods of calculation of real estate investing includes PSF (price per square feet), 50 % rule, 70% rule, ROE (return on equity), and IRR (Internal Rate of Return)