Top 10 Real Estate Financial Calculations Explained w/Spreadsheet

Real estate investors use a variety of mathematical tools to analyze the performance of their investment properties. We've taken some of the most popular ones and explain their purpose and how to do these real estate investment calculations.

Once you've learned about them, download the spreadsheets. One is the Real Estate Investment Calculator Sheet, and the other is the same sheet with sample data in it to show you formats.

1
Gross Potential Income

A lease sign is posted on one of the towers at the Parkmerced apartment complex May 26, 2010 in San Francisco, California.
Justin Sullivan / Getty Images News/Getty Images

Gross potential income is the expected income a property will produce without deductions for expected vacancy or credit loss.  It's pretty simple, just 12 months multiplied by the total rents expected per month.  Check out the link for more detail and an example calculation of Gross Potential Income.

Gross Potential Income calculation explained here.

2
Gross Operating Income

Investing 101
Jim Kimmons

This calculation takes into account losses due to vacancy and non-payment.  Costs when units are vacant include advertising for a new tenant, doing minor maintenance, repainting and rehab for a new tenant, and management costs for a new lease.

Go to the link below for more detail and an example calculation.

Detail of the Gross Operating Income calculation.

3
Gross Rental Multiplier

Duplex Property
CanStockPhoto

Though not the most precise of tools, the GRM can give you a quick comparison tool to decide on whether to do a more thorough analysis.

If you're shopping for a multi-family property, there could be many of them for sale in the area.  The GRM calculation gives you a very fast tool to see which ones to bring to the top of your list for more research.  It's a rough tool, but it helps for this one purpose.

Click the link below for an example calculation.

Get Gross Rental Multiplier help here.

4
Net Operating Income

Real Estate Market Report
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Here we throw in the operating expenses, such as management, repairs, janitorial, etc. for our NOI.  There can be a long list here, but they are only operating expenses, not depreciation or major work that must be depreciated over time.

  • management
  • advertising
  • janitorial
  • maintenance
  • repairs
  • legal
  • accounting
  • more...

Click below to see an example NOI calculation.

Net Operating Income calculation explained here.

5
Capitalization Rate

Real Estate Investing
canstockphoto

By using other properties' operating income and recent sold prices, the capitalization rate is determined and then applied to the property in question to determine current value based on income.

Cap Rate is a tool used by almost all commercial and apartment investors, as well as lenders and others who want to calculate the value of a property based on its income flow, and to compare it with other properties in the same market area.

Click the link for example cap rate calculations.

Capitalization Rate Calculation explained.

6
Cash Flow Before Taxes (CFBT)

We take net operating income and subtract capital cash expenditures as well as debt service, add back loan proceeds and interest income.

Now we're getting down to the detail and closer to the real net return on investment for the property.  The Cash Flow Before Taxes has considered all of the expense items, even those not cash out of pocket.  Now we see what the owner(s) will get for cash flow before their individual tax liabilities.

More on Cash Flow Before Taxes.

7
Cash Flow After Taxes (CFAT)

This one is easy, as it's the CFBT with taxes subtracted.  Using the owner's or investor's tax rate exposure, this calculation gets to the nitty gritty of what's left after everybody gets their cut, even Uncle Sam.

Click the link for an example calculation.

Details on Cash Flow After Taxes.

8
Break-Even Ratio

Commercial Lending
Commercial Lending. canstockphoto

Add Debt Service to Operating Expenses and divide by Operating Income.  

This is popular with lenders.  They want to know when the property will have paid all expenses of operation and break out into profit for the rest of the year.

More on Break-Even Ratio

9
Return on Equity - Year One

This is the percentage return on your cash investment the first year.

More on Return on Equity

10
Get the Real Estate Investment Calculator Sheets Here

Panic in Real Estate Industry
Panic in the Real Estate Industry. CanStockPhoto

I've put all of these into some easy to download and use spreadsheets that do all of the math for you.

Real Estate Investment Calculator Spreadsheet

Sample Sheet With Data Entered

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