Much of real estate investing comes down to analyzing data, so it’s important to know what numbers you should pay attention to…and what numbers you shouldn’t.  Math does not lie, but if not used and interpreted correctly, it can give a misleading picture.  This article will give a brief overview of some of the most common formulas you will come across in real estate and what they mean, but you should definitely do more research before you invest for the first time.

NOI: Net Operating Income

This is the most important number in real estate.  It is your total income minus your total expenses.  It is usually calculated on a monthly basis and will tell you your cash flow for that month.  Although the calculation is simple, the way to determine total income and total expenses can be difficult.

CAP Rate: Capitalization Rate

This is the NOI/cost, usually calculated yearly.  Some investors rely heavily on this number, and others just about ignore it.  It can be thought of as the return on investment you would make if you paid cash for the property.  Different markets have distinct CAP rates and knowing your property’s CAP rate can help you to determine how it fits in the market.

Gross Rent Multiplier.

This is determined by dividing the price of the property by the monthly rent, and is usually only used for rental properties with multiple units.  If it is under 100, the property should cash flow, and under 80 usually signifies a fairly decent deal.  This number can be used as a quick screening tool for good deals, but shouldn’t be the only formula you rely on.

DCR: Debt Service Coverage Ratio.

This is the NOI/annual debt service and is an important number in estimating if you will be able to get that loan.  Usually, lenders want to see at least a 1.20.   This would signify that in the case of a debt of $100, the income would be $120.  If the number is 1 then you’re breaking even.  Anything less than 1.0 means that you have to put money into the deal every month which is not a good.  Different investors have different comfort levels with this number; some prefer to be at 1.2, others are more secure with at least a 1.5.  The DCR is a very important number that  banks will look at closely if you expect to receive bank financing on commercial property.

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http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

With all the fervor about real estate volatility, the high number of  foreclosures and the inability of many homeowners to sell their houses, investing in real estate right now might seem laughable.  However, real estate still, and will always, offer a way to generate a passive income stream.  Owning a rental property will allow you to receive a monthly income without being actively involved.  Let me modify that by saying you will have to be involved at certain points with renovations and fix-ups, but you are able to have a day job and be a landlord simultaneously.

Passive income only comes from rental properties, but of course there are many kinds of real estate investments that can also turn a profit.  Flipping properties, retail/rehab, and wholesaling are all actively involved methods for earning money in real estate.  Holding properties is a much more laid-back approach to real estate with occasional periods of active involvement.

The key in holding properties is knowing the Net Operating Income, or NOI.  This is the total amount that you will make on a monthly or yearly basis, and the objective is to have a high enough NOI to cover all expenses plus your debt service and still have enough money to put in your pocket. It is calculated by taking your total income and subtracting your total operating expenses, but excluding your debt service.  The amount of NOI should cover your debt service plus all expenses of operation.  If you do not have historical operating expenses to go off of, then error on the side of over estimating your expenses and under estimating your income.   The concept is simple, but the execution at times can be a little more challenging. Special consideration needs to be taken to ensure an accurate representation of the future, specifically, determining the occupancy rate and how many of those tenants will pay rent on time.  The NOI is useful in single family buildings, multi family buildings, and commercial properties.

Of course, there are many other ways of investing that will give you a passive income stream and do not involve real estate.  Real estate is just one of those ways, but it is a good one.  Long-term investing in real estate can help you to provide for your family, retire early, or create a vacation fund.  Learn more about how rental properties can generate income and get started today!

Tell us what you think by leaving a comment.  If you would like to be notified when new posts are made to this site, be sure to subscribe to the RSS feed.

http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.