5 Real Estate Investing Calculations to Achieving Higher Returns
After analyzing thousands of properties for myself and for my clients as a Realtor, and after purchasing over 20 properties and the results I had, I realized you only need to look at 5 real estate investing calculations when analyzing a property before purchasing it.
In today’s video, I want to become your coach, which in my last video I talked about why you need a coach to help you invest in real estate, and teach you about the 5 calculations I use each time I analyze a property, which are:
NET OPERATING INCOME (NOI)
CAPITALIZATION RATE (CAP RATE)
CASH ON CASH RETURN
RETURN ON INVESTMENT (ROI)
Let’s start with NOI, as it’s the easiest to calculation, Revenue, your rental income, minus expenses. Now, this number alone doesn’t tell you a whole lot, however, the main purpose for using this calculation is it helps you to figure out the other 4 calculations.
Now let’s go through the next one.
Cap Rate, which is your NOI / Property Value.
It’s mainly utilized when analyzing commercial type properties, anything from offices, to convenience stores, to hotels, to used car lots, to multi-family residential properties. It is also widely used by investors and professional appraisers to determine the value of a property. This is because it is a quick way to analyze a property, as the way it works is it instantly tells you the return you’d get if you paid all cash for the property.
On to my favourite calculation, the cash on cash return an investment makes, which is calculated by taking your NOI minus your mortgage payments divided by the cash, capital you invested.
This measures as a percentage the amount of cash incoming to you after all expenses have been paid; your NOI, less your debts; your mortgage, to the amount of cash you have invested, cash out of your pocket, from your savings, or from a line of credit, or from your friends or family.
The next one, ROI, is the most thourgh, as it calculates the TOTAL CASH FLOW the property generated, which is your NOI – the mortgage, plus the properties APPRECIATION, plus the amount of principal on the MORTGAGE Paid DOWN, divided by your TOTAL CAPITAL INVESTED
Ya, that’s a mouth full. This isn’t an easy one to calculated, luckily the spreadsheets I use automatically do it for me, which you get when you enroll in my Analyze All Properties Program, here's a link you can click on to enroll too if you’re interested.
Now, the biggest difference between ROI and Cash on Cash return is you don’t actually get the full return, meaning you don’t see or get the appreciation of a property or the mortgage paydown, until you actually sell the property. However, when investing in real estate, this must be taken into consideration so you can figure out if an investment property is worth purchasing, versus another investment such as stocks or mutual funds. This way you are comparing apples to apples, which is why you need to use this calculation when determining which property to invest in.
Last but not least, the Payback Period, which can be calculated by taking the TOTAL CAPITAL INVESTED / TOTAL CASH FLOW.
This investing calculation is just as important as all the other ones we discussed, because it tells you how fast you will get the money you invested back. This is more for buy and hold properties, buy, fix and holds, and buy, fix, refinance and holds, as obviously for fix and flips, your payback period will be when you sell the property.