5 Most Important Real Estate Calculations

1. Cap Rate: 

Net Operating Income/Total Price of Property

Mostly used for valuing apartment complexes and other commercial buildings. You want to have a cap rate that is at least as good, preferably better, than comparable buildings in the area. I almost always want to be at a 10 cap or higher. Always use real numbers, not pro formas. 

2. Comparative Market Analysis

Unfortunately, there's no real calculation for this. It's mostly for houses and it's all about finding the most comparable properties and then making adjustments so that a homeowner or investor would find each deal identical. The MLS is by far the best for this, but Zillow can work too (just don't rely on the Zestimate).

3. Rent/Cost

Monthly Rent/Total Price of Property

This is a great calculation for houses and sometimes small multi's. There's the old 2% rule (which is way too broad, it depends on the area). According to Gary Keller, the national average is 0.7%. Regardless, this calculation gives you a good idea of how well a property will cash flow. It's good to have a target rent/cost percentage for any given area. 

4. Debt Service Ratio

Net Operating Income/Debt Service

This is the most important number for banks and so it is critical for getting financing. Anything under 1.0 means that you will lose money each month. Banks don't like that (and you shouldn't either). A 1.2 is generally the minimum you can afford.

5. Cash on Cash

Cash Flow/Cash In Deal

In the end, this is the most important number. It tells you what kind of return you are getting on your money. If you made $2000 on an investment you have $20,000 into, then you have a 10% cash on cash return. So don't neglect this calculation when reviewing your business.