by Dave Peniuk
As part of our 31 Real Estate Investing Videos series I put together this short little video on 3 real estate investing calculations you gotta know!! These are calculations I see plenty of realtors, real estate investors and media reporters getting wrong… and yet, they are critical to know and understand.
In case you haven’t signed up for our series (WHY HAVEN’T YOU?!! – It’s 31 FREE videos jam packed with some of our best tips & resources!) … or you missed this video … here it is:
What are some of the real e state investing calculations YOU use? Let us know in the comments below!
Nice video! It’s very simply put and easy to understand. It’s interesting when some investors and also sometimes real estate agents use potential gross income (instead of “gross income” aka the actual amount of gross income received) in their calculations. This can really turn a deal upside down if calculating on potential gross income since it’s not based on an actual figure. Also, I find some who don’t account for vacancy rates (or underrate them) and/or maintenance costs. These are all factors to consider when doing calculations – I find it best to be more realistic and practical rather than basing numbers on a “hunch” or a feeling when making calculations. Very informative video, good information here. Looking forward to checking out more of your videos, thanks for sharing!
Thanks for your comments mobilehomegurl!
I could not agree more with your comment regarding Potential Gross Income vs. Actual (or Current) Gross Income. It is often a HUGE difference! I see so many investors thinking they are buying a good deal because the Potential Income is twice what the actual income is…thinking it will be “easy” to just raise the rents to market level and they will be flooded with cash. The fact is, it is often much much more difficult to move the Actual Income to realize the suggested Potential Income. And Real Estate Agents are often guilty of showing (and emphasizing) the Pro-Forma Analysis (which is based on the Potential, not the current or actual income).
The savvy investors see thru this and can work on the actual numbers and determine if the Potential Income is realizable or not. THAT’s where the money is made!
Cheers!
p.s. I like Terminology Tuesday blog posts! : )
Sure, you’re welcome – nice to meet you! I can definitely relate, it’s most times the “Pro-Forma” analysis that agents provide to prospective buyers with many income properties that are marketed. And, yes there are many investors who remain hopeful and use potential income (based on a feeling and their gut) to evaluate properties. It’s really interesting. Some I have even heard say, they know these #s will work even (though they have based it on potential income).
Looking forward to reading more, you and Julie are great!
p.s. Glad you like Terminology Tuesday, figured it would be helpful – thanks for reading!
Great video Dave. I definitely learned something from this.
Glad you liked it Eric B. Thanks for stopping by!
Another calculation I use quite a bit is DCR – Debt Coverage ratio.
Operating Expenses/Principal+Interest = DCR
Although having GRM above 9-11 would usually indicate a DCR of 1.1 and above, it is relative to mortgage rates. It helps me decide whether to add it to the portfolio.
Thanks Quentin! Yes, a DCR is another great formula/calculation to be aware of and know.
Unless I misunderstood what you noted, the Debt Coverage Ratio is calculated as:
Net Operating Income / Debt Payment
So, if your NOI = $50,000 per year and
Debt Payment = $40,000 per year
DCR = 1.25
Generally, as you noted, a DCR of 1.1 and above is a pretty good buy. Once you get into 1.25 and up, then you have some serious positive cashflow!
Thanks for stopping in and reminding us of the DCR Quentin!
Cheers
I like the simplicity of these formulas. As a wholesaler it’s good to run these calculations on all properties to see who your potential buyers might be.
One question…
Where do you get the operating expenses from? Is this something that the current owner supplies? And if so can you trust those numbers? Ok that was actually 3 questions.
Good question(s) Scott!
If the property is listed, you’ll be able to obtain some of the Op Exp. from the Listing Realtor – taxes for instance are usually on the listing sheet or the Agent will have them. Things like Insurance (you’ll want to have a good Ins. Broker to help you with that), Heat/Hydro/Electricity bills etc. you’ll need to ask the Seller and/or the Agent for those. We usually ask for copies of the past 3-6 months to give us a ballpark for those bills.
As for Property Management, we suggest if you don’t already have a PM in that area, you make some calls to find out A – if they will Manage a property such as the one you are looking at, and B – what their fees are.
Maintenance is always a tough one to estimate, but this comes with experience. If it’s a brand new home or less than 5 years old, it’s likely to be 5% or less of the Rental income. As it gets older OR if it hasn’t been maintained well, you’re probably better off pushing that to 10% of rental income. This also depends on whether it’s a single, duplex, triplex, etc. The more units there are, the higher the percentage.
Hope that helps Scott!
Cheers
The formulas are really easy to pick up. Thank you for this, this is realy helpful to me! CHeers! keep posting.