Real Estate Investing Math Applications

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Real Estate Investing Math Applications

Nick J.
Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes

Firstly, if your name is Jon, JScott, Will, Bill or some other name I forgot but you know I'm talking to you. You're NOT allowed to answer the questions but ONLY allowed to correct and inform. Again, you're NOT allowed to give the answer but simply help if they're doing the formula wrong. Correct and inform on the formula but do NOT give the answer :mrgreen:

Here are some math questions that you might find interesting. They're not 'hard' by any means, you just have to make sure you understand the process of the math to get to the right answer.

What I'd like to do is see not only your answer but how you arrived to that answer. Hopefully, this will help you learn/master the process and help those that are still learning.

1: The property tax rate in Nick's area is $9.82 per $100 of assessed value. The assessed value is $9,290. What are Nick's taxes?

2: Nick's property has a market value of $80,000 and is to be insured at 85% of value. The insurance rate is $0.98 per $100 of insurance value for a 3-year period. What is the annual premium?

3: Nick has a home with an assessed value of $39,350. The tax is $12.20 per $100 of assessed value. What are Nick's taxes?

4: The county assesor says the full cash value of a 12,000 sq ft strip center you have listed is $825,000. Annual income is $12/sq. ft/year, minus a 14% vacancy rate and a 3% credit loss. Owner's expenses are: $23,000 property tax and $12,000/year insurance. What is the Cap Rate?

Lastly: My sister owns an apartment complex which rents as follows: 3 - 1br @ $350/mo; 15 - 2br @ $440/mo; 3 - 2br @$495/mo. You determine a 10% vacancy rate and 3% credit losses/year. The annual property tax is $7,300; the insurance is $2,100. She takes $6,500/year depreciation. An investment broker suggest 10.25% Cap Rate. What is your estimate of Value?

You don't have to do all of them if you don't want to. These are questions that I'll be getting tested on when I take my RE licensing exam. I already knew/know the answers but I wanted to give others an example to learn from.

Good luck, don't be scared to be wrong, be scared to NOT try

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y

Note that on problem #2, Nick says "$0.98 per $100 of insurance value for a 3-year period." and then asks "What is the annual premium?"

#5 is the same basic calculation as #4. You properly computed the cap rate, Kenneth, from the NOI and value (notwithstanding the insanity of using an assessment as a value). For #5 you know the cap rate and can compute the NOI...

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  • James Hiddle
    Altus, OK · Member since 2008 · 2k+ posts · 690 votes
    15y

    1.288
    2.2
    3.288
    4.2
    5.2 or 288 depending on the day of the week.

    What do I win?

    Ok seriously it's late I'll try to tackle this tomorrow chow.

    0Reply
  • Dale Osborn
    Mobile Home Investor · Spanaway, WA · Member since 2008 · 1k+ posts · 578 votes
    15y

    1. $912.28
    2. $666.40
    3. $4,800.70
    4. 10%
    5. $838,725.85

    0Reply
  • Vikram C.
    Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
    15y

    Is #4 a trick question? A person would normally want to know the price of an asset in order to determine the cap rate. We only have the assessor's FCV, which is not very useful.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y
    Originally posted by Vikram C.:
    Is #4 a trick question? A person would normally want to know the price of an asset in order to determine the cap rate. We only have the assessor's FCV, which is not very useful.

    Vikram, I'm pretty sure you're included in the proctor side of Nick's thread. Nick is going throuh RE school and these may be the questions asked on the exam, while there are not sometimes valid in reality, the answer comes from the information given. Use the value given to arrive at an answer.

    Nick was wanting those with less than a few years experience to answer, so that leaves us out!

    1Reply
  • Vikram C.
    Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
    15y

    Bill, I figured I should stay out of the solution part, but took Nick's invitation to "correct and inform."

    :)

    1Reply
  • Anthony Halstead
    Developer · Member since 2010 · 72 posts · 31 votes
    15y

    #2. 222.13 annually?

    0Reply
  • Greg B.
    Homeowner · Burleson, TX · Member since 2008 · 756 posts · 376 votes
    15y

    Realtyman is right about the first 3. I'll have to check the last 2 later.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    SHOW YOUR WORK! How you did it.

    Realtyman might be right.

    0Reply
  • Kenneth Smith
    Real Estate Investor · Dania Beach, FL · Member since 2010 · 74 posts · 41 votes
    15y

    A nice way to wake up. Coffee and some brain teasers.

    1.) 9290/100 = 92.90 x 9.82 = 912.28

    2.) 80,000 x .85 = 68,000/100 = 680 x .98 = 666.40

    3.) 39,350/100 = 393.50 x 12.20 = 4,800.70

    4.) Annual Income 144,000
    Vacancy Rate (20,160)
    Credit Loss ( 4,320)
    Prop Tax (23,000)
    Insurance (12,000)

    Net 84,520

    CAP Rate = 84,520/825,000 = 10.24%

    Last: Stumped

    How'd I do?

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    Note that on problem #2, Nick says "$0.98 per $100 of insurance value for a 3-year period." and then asks "What is the annual premium?"

    #5 is the same basic calculation as #4. You properly computed the cap rate, Kenneth, from the NOI and value (notwithstanding the insanity of using an assessment as a value). For #5 you know the cap rate and can compute the NOI...

    2Reply
  • Kenneth Smith
    Real Estate Investor · Dania Beach, FL · Member since 2010 · 74 posts · 41 votes
    15y

    Jon,

    Just curious. Do insurance companies actually quote this kind of a premium? I can't believe they would commit to an extended period, with changes happening in the marketplace all the time. I've only dealt with my personal residence and had a friend who is an insurance agent, so I just left it to her to come up with a rate. But it was annually.

    I know this is off-topic. Was just curious. Thanks.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    No idea. I just get an annual notice. I was just going with what Nick wrote.

    1Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    No, it's just a math problem. Insurance premiums are structured to annualized premiums.

    0Reply
  • Nick J.
    OP
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    15y

    Realtyman is doing pretty good but I'd like to see his work and how he came to those answers.

    Kenneth Smith is doing just fine, great job showing your work. I am surprised you're stumped at #5 though when you did so well on #4.

    Add all the rents and annualize them from the written 'monthly' and try the problem again. Also, remember that depreciation is not an allowable operating expense so that leaves you with property tax and insurance as expenses.

    Anthony Halstead, no worries, we're here to teach and learn from another. If you tell us how you came to your answer, we'll be able to help you in correcting your math.

    0Reply
  • Kenneth Smith
    Real Estate Investor · Dania Beach, FL · Member since 2010 · 74 posts · 41 votes
    15y

    Okay Nick,

    Let's try #5

    Annual Income 109,620
    10% Vacancy (10,962)
    3% Credit Loss ( 3,289) Rounded off
    Prop. Tax ( 7,300)
    Insurance ( 2,100)

    Net 85,969
    CAP Rate 10.25%

    Value = 85,969/.1025 = 838,722 Yes? No?

    1Reply
  • Nick J.
    OP
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    15y

    See, not so hard is it Kenneth?

    I think the trick there was to know you have to annualize the monthly rents and know depreciation was not an allowable expense to be ale to formulate that question properly.

    Any other takers? Don't be shy! I can post up a few more if you guys want.

    1Reply
  • Kenneth Smith
    Real Estate Investor · Dania Beach, FL · Member since 2010 · 74 posts · 41 votes
    15y

    Being an Accountant/Controller in the construction biz here, I knew about the depreciation. I think I had a little "gap" this morning thinking about it. lol.

    Good way to start the day though!

    0Reply
  • Nick J.
    OP
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    15y
    Originally posted by Kenneth Smith:
    Being an Accountant/Controller in the construction biz here

    Then you're not allowed to play :mrgreen:

    0Reply
  • Kenneth Smith
    Real Estate Investor · Dania Beach, FL · Member since 2010 · 74 posts · 41 votes
    15y

    Should've said used to be and it was not in the investing arena. This is all new to me. But it does have me hooked!

    0Reply
  • Giovanni Isaksen
    Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
    15y

    RE #5 Tell your sister I'll pay her $838,726 cash for her apartment if she'll continue to cover the maintenance & repairs, payroll & burden, property management, utilities, G&A, accounting & legal, leasing and advertising, landscaping and $200/unit annual reserve for replacement that are missing from the proforma :)

    0Reply
  • Vikram C.
    Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
    15y
    Originally posted by motiv8td:
    I can post up a few more if you guys want.

    How about some difficult ones that might challenge us all?

    0Reply
  • Nick J.
    OP
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    15y
    Originally posted by Giovanni I.:
    RE #5 Tell your sister I'll pay her $838,726 cash for her apartment if she'll continue to cover the maintenance & repairs, payroll & burden, property management, utilities, G&A, accounting & legal, leasing and advertising, landscaping and $200/unit annual reserve for replacement that are missing from the proforma :)

    [EDITED]
    0Reply
  • Kenneth Smith
    Real Estate Investor · Dania Beach, FL · Member since 2010 · 74 posts · 41 votes
    15y

    Nick,

    I was going to respond (which would have been in line with what you said), but thought I would wait and see if anybody would reply to that. I'm glad you did. Thanks. :roll:

    0Reply
  • Nick J.
    OP
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    15y
    Originally posted by Kenneth Smith:
    Nick,

    I was going to respond (which would have been in line with what you said), but thought I would wait and see if anybody would reply to that. I'm glad you did. Thanks. :roll:

    its all good. I was just messing anyways. Figured if he could dish, he should be able to take it too :mrgreen:

    No worries.

    Vikram, how about NOT. You're too smart anyways. I'd have to dig far and wide to come up with an equation that would challenge you. This is why I said(and I should have mentioned you and Justin) certain people were not allowed to answer, only help.

    0Reply
  • James Hiddle
    Altus, OK · Member since 2008 · 2k+ posts · 690 votes
    15y

    Man you could have fooled me Nick. Thought you were going to jump through your screen to choke the guy lol :mrgreen:

    0Reply
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