Top 21 Real Estate Analysis Measures & Formulas

Real estate investing requires an understanding and proficiency of at least a handful of financial
measures and formulas, otherwise investment opportunities can't be evaluated correctly, and
investment money can be lost.
So to help you better understand real estate investing, I've assembled a list of twenty-one measures
and formulas used in real estate investing. Some formulas are omitted because they are complex
and would require a financial calculator or real estate investment software to compute.
1. Gross Scheduled Income (GSI) This is the total annual income of the property as if all the
space were 100% rented and all rent collected. It includes the actual rent generated by occupied
units, as well as potential rent from vacant units.
Example: $46,800
2. Vacancy & Credit Loss This is potential rental income lost due to unoccupied units or
nonpayment of rent by tenants.
Example: $46,800 x .05 = $2,340
3. Gross Operating Income (GOI) This is the gross operating income, less vacancy and credit
loss, plus income derived from other sources such as coin-operated laundry facilities.
Example: $46,800 2,340 + 720 = $45,180
4. Operating Expenses These are the costs associated with keeping a property in service and
revenue flowing. This includes property taxes, insurance, utilities, and routine maintenance but
does not include debt service, income taxes, or depreciation.
Example: $18,525
5. Net Operating Income (NOI) - Net operating income is one of the most important measures
because it represents a return on the purchase price of the property and, in short, expresses an
objective measure of a property's income stream. It is the gross operating income, less the
operating expenses.
Example: $45,180 18,525 = $26,655
6. Cash Flow before Taxes (CFBT) - Cash flow before taxes is net operating income, less debt
service and capital expenditures, plus earned interest. It represents the annual cash available before
consideration of income taxes.
Example: $26,655 19,114 = $7,541

7. Taxable Income or Loss This is the net operating income, less mortgage interest, real
property and capital additions depreciation, amortized loan points and closing costs, plus interest
earned on property bank accounts or mortgage escrow accounts. Taxable income may be negative
as well as positive. If negative, it can shelter your other earnings and actually result in a negative
tax liability.
Example: $1,492
8. Tax Liability (Savings) This is what you must pay (or save) in taxes. It's calculated by
multiplying the taxable income or loss by the investor's tax bracket.
Example: $1,492 x .28 = $418
9. Cash Flow after Taxes (CFAT) This is the amount of spendable cash generated from the
property after consideration for taxes. In brief, it's the bottom line, and is calculated by subtracting
the tax liability from cash flow before taxes.
Example: $7,541 - 418 = $7,123
10. Gross Rent Multiplier (GRM) This provides a simple method you can use to estimate the
market value of any income property.
Formula: Price / Gross Scheduled Income = GRM
Example: $360,000 / 46,800 = 7.69
11. Capitalization Rate Cap rate (as it's more commonly called) is the rate at which you
discount future income to determine its present value.
Formula: NOI / Value = Cap Rate
Example: $26,655 / 360,000 = 7.40%
12. Cash on Cash Return This represents the ratio between the property's annual cash flow
(usually the first year before taxes) and the amount of the initial capital investment (down payment,
loan fees, acquisition costs).
Formula: CFBT / Cash Invested = Cash on Cash
Example: $7,541 / 110,520 = 6.82%
13. Time Value of Money - This is the underlying assumption that money, over time, will change
value. For this reason, investment real estate must be studied from a time value of money
standpoint because the timing of receipts might be more important than the amount received.
14. Present Value (PV) - This shows what a cash flow or series of cash flows available in the
future is worth in purchasing power today. It's calculated by "discounting" future cash flows back
in time using a given rate of return (i.e., discount rate).

15. Future Value (FV) - This shows what a cash flow or series of cash flows will be worth at a
specified time in the future. It's calculated by "compounding" the original principal sum forward at
a given compound rate.
16. Net Present Value (NPV) - This discounts all future cash flows by a desired rate of return to
arrive at a present value (PV) of those cash flows, and then deducts it from the investor's initial
capital investment. The resulting dollar amount is either negative (return not met), zero (return
perfectly met), or positive (return met with room to spare).
17. Internal Rate of Return (IRR) - This model creates a single discount rate whereby all future
cash flows can be discounted until they equal the investor's initial investment.
18. Operating Expense Ratio - This provides the ratio of the property's total operating expenses to
its gross operating income (GOI).
Formula: Operating Expenses / GOI = Operating Expense Ratio
Example: $18,525 / 45,180 = 41.00%
19. Debt Coverage Ratio (DCR) - This is the ratio between the property's net operating income
and annual debt service for the year. Lenders typically require a DCR of 1.2 or more.
Formula: Net Operating Income / Annual Debt Service = Debt Coverage Ratio
Example: $26,655 / 19,114 = 1.39
20. Break-Even Ratio (BER) - This measures the portion of money going out against money
coming in, and tells the investor what part of gross operating income will be consumed by all
estimated expenses. The result always must be less than 100% for a project to be viable (the lower
the better). Lenders typically require a BER of 85% or less.
Formula: (Operating Expense + Debt Service) / Gross Operating Income = BER
Example: ($18,525 + 19,114) / 45,180 = 83.31%
21. Loan to Value (LTV) - This measures what percent of the property's appraised value or selling
price (whichever is less) is attributable to financing. A higher LTV means greater leverage (higher
financial risk), whereas a lower LTV means less leverage (lower financial risk).
Formula: Loan Amount / Lesser of (Appraised Value or Selling Price) = LTV
Example: $252,000 / 360,000 = 69.22%