21 Key Real Estate Investing Measures & Formulas

Posted on January 12, 2023 by dayat

A must-have article for anyone involved with real estate investing; a comprehensive list of twenty-one key definitions and formulas used extensively in investment real estate analysis.

Real estate investing requires an understanding and proficiency of at least a handful of financial measures and formulas,Guest Posting 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 by investors. Some formulas are omitted because they require a financial calculator or investment real estate software to compute.

1. Gross Scheduled Income (GSI) – This represents the property’s total annual income, as if all the space was occupied and all the 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 expenses needed to keep a property in service and its revenue stream flowing. This includes such things as property taxes, utilities, and routine maintenance, but does not include loan payments, income taxes, or cost recovery.

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 and higher cash flow after taxes.

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. It’s 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: Net Operating Income / 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: Cash Flow before Taxes / 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 result will be negative (return not met), zero (return perfectly met), or positive (return well met).

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 / Gross Operating Income = 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 what portion of money coming in is going out, in turn telling the investor what part of gross operating income will be consumed by operating expenses. The result should be less than 100% 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

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Who really pays the Income Taxes?

Posted on January 12, 2023 by dayat

Who pays the income taxes, and for whom does it benefit? Is every income accounted for income tax?

With all the talk of the rich are not paying their fair share of taxes and the tax cuts earlier this decade only went to the rich,Guest Posting here are some facts to contemplate and you as the reader can make up your own opinion.

The statement above could be true when you look at it from a pure dollar point of view. Someone who makes $500,000 versus someone who makes $50,000, if they each get a 5% tax cut, the first one pays $25,000 less in taxes, where the second one only pays $2,500 less in taxes.
I believe if you want to make an argument who pays more in taxes, you should look at a percentage of income paid and not the dollar figure.
Let’s look at some facts here from the latest statistics from the IRS that can be found on their website:

The top 25 percent of income earners pay 86% of all personal, federal income taxes. That is up from 84 percent in 2002.
The top 50 percent of income earners pay 97% of all personal, federal income taxes, which also means that the lower half of all income earners in this country pay 3% of all personal, federal income taxes. The medium in 2006 was just over $48,200.
What is amazing is that the top 1 percent of income earners pay 39% of all personal, federal income taxes, which is up almost 6 percent since 2002.
20 years ago, the top 1% paid a little over 27 percent of all personal, federal income taxes, and the top 50 percent paid about 94 percent.
All the talk about the lower income bracket not getting enough of a tax cut has a mathematical problem. How can you cut taxes for someone who already pays very little or nothing? That was actually answered during the tax cuts in 2003 by cutting the lowest bracket from 15% to 10%. So the people who pay most of their taxes in the lower of two lowest brackets received a 30% tax cut. This obviously is not a large dollar figure, but a nice percentage cut. In addition tax credits were increased.

Anyway, the issue we have at hand is that the taxes are paid by a smaller and smaller part of the population. This results in several problems:

There is a large part of the population that is no longer contributing, even if it is a small amount. Any tax law changes do not affect them and therefore they don’t care.
The smaller the pot from where the taxes come from, any changes in the economy or the behavior of people will have a much bigger impact on the amount of money received by the treasury.
The problem is even worse than people not paying any taxes, you can actually get money back even if you don’t owe any. There are two that come to mind, the Child Tax Credit and the Earned Income Credit. I think the second one is a good thing as it is an incentive to work, and the more you work, the more you get and it is capped at a low income and favors people with children. There is nothing wrong with the Child Tax Credit, but I don’t see why someone actually needs to get a refund beyond their overpayment.

The tax laws are also screwed once you make too much money in the government’s point of view regarding credits and deductions. Anyone making more than $100,000 is rich in the government point of view. I would certainly disagree on that, ask a mom or dad with two or three kids making in the low $100s if they feel rich. Anyway, once you reach that level, many of the deductions like tuition are being phased out, the child credit disappears just to mention a few. You will not get a dollar for dollar deduction anymore for your mortgage, charity, state taxes etc. I could go on and on. In some circumstances, because of the phase outs, the effective tax rate for a certain income range (like the income from $110K to $115K, which is just an example as it depends on the situation), is in the confiscatory category where literately a huge chunk of extra earned money goes to the government. This is offset somewhat by not having to pay social security taxes anymore, but that is story for a different day.

I think what we need is a flatter tax with less deductions. All of us should pay something, because once you have some money invested, you might actually have some interest how it is spend. We need to be generous to the ones in need and the unfortunate, but that is not almost half the population that pays only 3 percent of the taxes. We should be more generous with families than with single people, nevertheless they should all pay the same rate, just the dollar figure when you start taxing should be different.

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