Real Estate Investment Analysis Formulas
Income and Expense Statement

Income

Potential Gross Income (PG1) $__________

Less: Vacancy and Bad Debt Allowance __________

Equals: Effective Gross Income (EGI) $__________

Operating Expenses

Exclude: Depreciation

Mortgage Payments

Non-Operating Expenses. E.G Directors Salaries

Capital Expenditures $__________

Net Operating Income (NO1) __________

Less: Debt Service (P + I) __________

Cash Flow Before Tax (CFBT) __________

Less: Income Taxes __________

Equals Cash Flow After Tax (CFAT) $__________

Financial Measures:

Potential Gross Income Multiplier (PGIM)

Also called Potential Gross Rent Multiplier(PGRM)

PGIM = Market Value or Market Value = Potential Gross Income x PGIM

Potential Gross Income

MV = EGI x EGIM

= MV

PGI

Effective gross Income Multiplier (EGIM)

Also called Effective Gross Rent Multiplier(EGRM)

EGIM = Market Value or Market Value = Effective Gross Income x EGIM

Effective Gross Income

MV = EGI x EGIM

= MV

PGI

Net Income Multiplier (NIM)

NIM = Market Value or Market Value = Net Operating Income x Net Income Multiplier

Net Operating Income

MV = NOI x NIM

= MV

NOI

Capitalization Rate (Cap Rate)

Also called Broker’s Yield

Cap Rate(%) = Net Operating Income x 100 or Market Value = Operating Income x 100

Market Value Cap Rate(%)

= NOI x 100 MV = NOI x 100

MV Cap Rate(%)

Return on Equit y(ROE)

Also called: Equity Dividend Rate(EDR)

Cash on Cash Return

ROE(%) = (Net Operating Income – Debt Service) x 100

Equity

Where: Equity = Market Value – Mortgage

Debt Service = Principal & Interest Payment or MV = (NOI-DS) x 100 + Mortgage

ROE(%)

ROE(%) = Cash Flow Before Tax x 100

Equity

ROE(%) = (NOI–DS) x 100

(MV–Mtge.)

Default Ratio (Break-even) (%)

Using Potential Gross Income Using Effective Gross Income

= (Operating Expenses + Debt Service) x 100 = (Operating Expenses + Debt Service) x 100

Potential Gross Income Effective Gross Income

Financing Measures.

Debt Service Ratio (DSR) Loan to Value Ratio (%)

= Net Operating Income = Loan Amount x 100

Debt Service Market Value

Rental Apartment Building Measures.

1. Price Per Suite

2. Price Per Sq. Foot (Using Suite Areas)

3. Rents Per Sq. Foot per month

4. Operating Costs

a. Operating Costs Per Suite Per Year

b. Operating Cost per Sq. Foot per Year

5. Operating Expense Ratio (OER) = Operating Expense x 100

Effective Gross Income

Home Financing:

Gross Debt Service Ratio = (Principal + Interest + Taxes)

Gross Family Income

Lenders often modify the basic Gross Debt Service Ratio Formula.

Modified Gross Debt Service Ratio = (Principal + Interest + Taxes + Heat + % of Maintenance

Gross Family Income

Total Gross Debt Service Ratio = (Principal + Interest + Taxes + Other Debt Payments)

Gross Family Income

Commercial Real Estate Sample Calculations

The following examples illustrate how to use the real estate formulas. In Example No.1 the information is obtained for the property and

the financial measures calculated. In Example No. 2 the financial measures such as the Cap Rate are obtained for comparable sales and

are used to calculate the Market Value for the subject property.

Example No 1.

Sale Price (Market Value) $3,165,000

Potential Gross Income: $306,000

Vacancy & Bad Debt Allowance: 4.5%

Operating Expenses $58,000

Mortgage $2,056,000

Mortgage Payment (P+i) $180,538

Number of Suites 30

Total Rentable Area 24,000 Square feet

Note: All figures are annual

Calculate: Potential Gross Income Mulitplier (PGIM)

Effective Gross Income Multiplier (EGIM)

Net Income Multiplier (NIM)

Capitalization Rate (Cap Rate)

Return on Equity (ROE)

Default Ratio (Break even) based on:

Potential Gross Income

Effective Gross Income

Debt Service Ratio (DSR)

Loan to Value Ratio

Price per Suite

Price per Square Foot

Rent per Square Foot per Month

Operating Cost per Suite per Year

Operating Cost per Square Foot per Year

Operating Expense Ratio (OER) based on:

Potential Gross Income

Effective Gross Income

1. Construct an Annual Income and Expense Statement

Potential Gross Income $306,000

Less Vacancy & Bad Debt Allowance (4.5%) 13,770

Effective Gross Income $292,230

Operating Expenses 58,000

Net Operating Income $234,230

Less; Debt Service (P+i) 180,538

Cash Flow Before Tax $ 53,692

2. Calculate the Financial Measures

Potential Gross Income Multiplier (PGIM):

PGIM = MV = 3,165,000

PGI 306,000

= 10.34

Effective Gross Income Multiplier (EGIM):

EGIM = MV = 3,165,000

EGI 292,230

= 10.83

Net Income Multiplier (NIM):

NIM = MV = 3,165,000

NOI 234,230

= 13.51

Capitalization Rate (Cap Rate):

Cap Rate = NOI = 234,230 x 100

MV 3,165,000

= 7.40%

Return on Equity (ROE):

ROE = (NOI – DS) x100 = Cash Flow Before Tax x 100

EGI Equity

= 53,692 x 100

(3,165,000 - 2,056,000)

= 4.84%

Default Ratio (Breakeven):

Based on Potential Gross Income:

Default Ratio = (Operating Expenses + Debt Service) x 100

Potential Gross Income

= (58,000 + 180,538) x 100

306,000

= 77.95%

Default Ratio (Breakeven) cont.

Based on Effective Gross Income:

Default Ratio = (Operating Expenses + Debt Service) x 100

Effective Gross Income

= (58,000 + 180,538) x 100

292,230

= 81.63%

Debt Service Ratio (DSR) = Net Operating Income

Debt Service

= 234,230

180,538

= 1.30

Loan to Value Ratio % = Loan Amount x 100

Market Value

= 2,056,000 x 100

3,165,000

= 64.96%

Price Per Suite = 3,165,000

30

= $105,500

Price per Square foot = 3,165,000

24,000

= $131.88

Rent Per Sq. Foot per Mo. = 306,000

24,000 x 12

= $1.06

Operating Costs Per Suite Per Year

= 58,000

30

= $1,933

Operating Cost per Square foot per year

= 58,000

24,000

= $2.42

Operating Expense Ratio (OER)

Based on Potential Gross Income:

= Operating Expenses x 100

Potential Gross Income

= 58,000 x 100

306,000

= 18.95%

Based on Effective Gross Income:

= Operating Expenses x 100

Effective Gross Income

= 58,000 x 100

292,230

= 19.85%

Summary.

Potential Gross Income Multiplier (EGIM): 10.83

Potential Gross Income Multiplier (EGIM): 10.83

Net Income Multiplier (NIM): 13.51

Capitalization Rate (Cap Rate) 7.40%

Return on Equity (ROE) 4.84%

Default Ratio (Break-even) based on:

Potential Gross Income 77.95%

Effective Gross Income 81.63%

Debt Service Ratio (DSR) 1.30

Loan to Value Ratio 64.96%

Price per Suite $105,000

Price per Square Foot $131.88

Rent per Square foot per month $1.06

Operating Cost per Suite per Year $1,933

Operating Cost per Square Foot per Year $2.42

Operating Expense Ratio (OER) based on:

Potential Gross Income 18.96%

Effective Gross Income 19.85%

Example No 2.

Potential Gross Income: $244,800

Vacancy & Bad Debt Allowance: 5.0%

Operating Expenses $49,300

Mortgage $1,685,000

Mortgage Payment (P+i) $147,500

Number of Suites 24

Total Rentable Area 18,720 Square feet

Note: All figures are annual

Calculate the Market Value using the following financial measures

Effective Gross Income Multiplier (EGIM): 9.30

Net Income Multiplier (NIM): 12.50

Capitalization Rate (Cap Rate): 8.00%

Return on Equity (ROE): 5.57%

1. Start by constructing the Annual Income and Expense Statement

Potential Gross Income $244,800

Less Vacancy & Bad Debt Allowance (5.0%) 12,240

Effective Gross Income $232,560

Operating Expenses 49,300

Net Operating Income $183,260

Less; Debt Service (P+i) 147,500

Cash Flow Before Tax $ 35,760

2. Calculate the Market Value based on the:

Effective Gross Income Multiplier (EGIM):

MV = Effective Gross Income x EGIM

= 232,560 x 9.30

= $2,162,808

Net Income Multiplier (NIM):

MV = Net Operating x NIM

= 183,260 x 12.50

= $2,290,750

Capitalization Rate (Cap Rate):

MV = Net Operating Income x 100

Cap Rate

= 183,260 x 100

8.0

= $2,290,750

Return on Equity (ROE):

MV = (NOI - DS) x 100 + Mortgage

ROE

= (183,260 - 147,500) + 1,685,000

5.57

= $2,327,011