Chapter 25 - Real Estate Mathematics

Common Formulas

Commission

Commission = Sales Price x Commission Rate

Percentage to number = move decimal two places. (5% = .05, 50% = .5)

Down Payment Percentage

Down Payment Percentage = (Down Payment Amount / Sales Price) x 100

Calculates the percentage of the purchase price paid upfront.

Loan-to-Value Ratio (LTV)

LTV = (Loan Amount / Market Value) x 100

Expresses the ratio of a loan to the value of an asset purchased.

Proration

Step 1 - Count the days needed to be prorated.

Step 2 - Calculate the daily rate (amount/ number of days in the cycle - 30 or 360)

Step 3 - Daily rate x Days = credit/debit to the appropriate party.

Net Operating Income (NOI)

NOI = Gross Operating Income - Operating Expenses GOI - Rent income (minus vacancy) + Ancillary income.

Operating Expenses:

Includes Property taxes, Insurance premiums, Property management fees, Utilities (?), Maintenance and repairs etc.

Excludes mortgage payments, capital expenditures, depreciation and income taxes)

Gross Rent Multiplier (GRM) - A quick way to estimate the value of an income-producing property.

GRM = Property Price / Gross Annual Rental Income

Capitalization Rate (Cap Rate) - Used to estimate the profitability of an investment property.

Capitalization Rate = Net Operating Income / Market Value

Property Value = Net Operating Income (NOI) / Capitalization Rate (Use the decimal, not the percent)

Finding NOI = Cap Rate X Value

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Property Taxes

Annual Property Taxes = Assessed Value x Tax Rate

If Tax rate is stated as “y per x” then divide y by x.

Example: $2.30 per 100 = .23

1 mill is equal to $1 in property tax levied per $1,000 of a property's assessed value

Price Per Square Foot

Price Per Square Foot = Property Price / Total Square Footage

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Area Calculations

Area of a rectangle/square: Width x Depth (Length)

Width = frontage in a lot size.

Area of a triangle: (Base x Height) / 2

Volume of a Rectangle = Length x Width X Height

Volume of a Triangle = (Length x Width X Height) /2

LAND UNITS AND MEASUREMENTS

Some commonly used land units and measurements are the following:

An acre contains 43,560 square feet. Memorize this one.

A section of land is one square mile and contains 640 acres; a quarter section contains 160 acres; a quarter of a quarter section contains 40 acres.

Simple Interest

Interest = Principal x Rate x Time

Used to calculate interest on mortgage loans or other financing.

Unit Vocabulary

Acre: A unit of land measurement equal to 43,560 square feet.
Commission: A fee paid to a broker for services rendered, usually calculated as a percentage of the sales price of a property.
Front foot: A unit of measurement for land that refers to the width of a property along the street or waterfront.
Gross income: The total income received from a property before any expenses are deducted.
Hectare: A metric unit of land measurement equal to 10,000 square meters, or approximately 2.471 acres.
Interest: The cost of borrowing money, usually expressed as a percentage of the loan amount. It's like rent paid for the use of someone else's money.
Net income: The income remaining after all expenses have been deducted from the gross income.
Points: Fees paid to a lender at closing to reduce the interest rate on a loan. Each point is equal to 1% of the loan amount.
Principal: The original amount of money borrowed in a loan or the amount invested.
Real property tax rates: The amount of tax levied on real estate, usually expressed as a percentage of the assessed value of the property, or in mills (dollars per $1,000 of assessed value).