Running numbers to determine if an investment property is a good fit does not have to be difficult. In fact, most of the math you’ll need is grade-school level. Here are some of the basic concepts and math formulas you’ll need to use.
Income is simply the amount of money that a property brings in. All you need to do is: Add up the amount of rent collected and any additional fees that come in. For example—you own a rental house. The home rents for $1,000, and the tenant also pays $25 for the use of the garage. $1000 + $25 $1025 Your total income was $1,025. Income could also include late fees, application fees, pet fees, laundry or other vending machines, and any other value your rental brings in.
Expenses are simply the things within your investment that cost you money. For example, if the loan from the bank is $500 per month, home maintenance is $100 per month, and the garbage bill is $50 per month, then the total of these three expenses is $650. $500 + $100 + $50 $650 Your total expenses for this example are $650 for this particular month. There are many other expenses that you’ll face as a real estate investor, including taxes, insurance costs, management costs, holding costs, capital expenses, and various others.
Cash flow is the amount of money left over at the end of the month after all expenses are paid. To determine the cash flow, simply subtract the total expenses from the total income: $1025 – $650 $375 Your total cash flow for the above example property is $375 for the month. Let’s look at a few more math equations.
Return on investment (also known as ROI) is a fancy way of describing what interest rate you make on your money each year. For example, if you invested $250 and you made $250 from that investment (for a total of $500) over the course of one year, you would have made a 100 percent return on investment. Similarly, if you invested $5,000 and made an additional $2,500 over the course of the year (for a total of $7,500), you would have made a 50 percent return on your investment that year. The actual calculation for return on investment looks like this: ROI = (V1 – V0) / (V0) (where V1 is the ending balance and V0 is the starting balance) A simple scenario for using ROI to calculate an investment return would be as follows: On January 1, you put $1,000 into a bank account. On the following January 1, you cash out the account for $1,100. Your ROI on the investment is: ROI = (1100 – 1000) / (1000) = 0.10 (or 10%) You start with $1,000 and end up with $1,100 after a year for a return of 10 percent. These simple concepts present the foundations upon which almost all other real estate calculations are based. The rest will come in time, but bear in mind that most calculations will be related to these numbers.
