Real Estate investment formulas are essential to analyze real estate investment opportunities properly.
Some people have compared learning these real estate investment formulas to an MBA. Fortunately, there’s an easy way to remember these common real estate math formulas using the triangle method.
A good way to grasp the formulas is to use the triangle method to help you perform the calculations in the correct order. This method is especially helpful to ace the OREA articling course.
The values at the top are divided by either of the quadrants on the bottom. You can also multiple the two values across the bottom of the triangle to arrive at the corresponding value at the top.
Take the cap rate triangle for example: Net Operating Income divided by the Sales Price gives you the Overall Cap Rate.
Real Estate Investment Formulas in the Triangle
- Net Operating Income = Sales Price x Overall Cap Rate
- Break Even Ratio = (Operating Expenses + Debt Service) ÷ Gross Operating Income
- Capital Gain/Loss = Sale Price – Adjusted Cost Base – Cost of Sale
- Cap Rate = Net Operating Income ÷ Value
- Cap Rate (Equity) = Cash Flow Before Taxes ÷ Initial Investment
- Cap Rate (Overall) = (Mortgage Cap Rate X Loan%) + (Equity Cap Rate X Equity%)
- Cash on Cash = CFBT / Initial Investment
- Modified Cash on Cash = CFAT + Equity Buildup / Initial Investment
- Estimate of Value = Net Operating Income ÷ Cap Rate
- Gross Income Multiplier = Sale Price ÷ Gross Operating Income
- Payback Period = Equity Investment ÷ Cash Flow Before Taxes
- Reversionary Value = NOI for Last Year ÷ Terminal Cap Rate
Other Real Estate Investment Formulas
- Annual Debt Service = Monthly Mortgage Payment X 12
- Cash Flow Before Taxes = Net Operating Income – Annual Debt Service
- Cash Flow After Tax = Cash Flow Before Tax – Tax Liability
- Cap Rate (Band of Investment) = [(Land Ratio x Return Rate of Land) + (Building Ratio X Return Rate of Building) + Recapture of Building]
- Sale Proceeds Before Tax = Sale Price – Cost of Sale – Mortgage Balance
- Sale Proceeds After Tax = Sale Proceeds Before Tax – Tax Liability
- Tax Liability = Sale Proceeds Before Tax x Marginal Tax Rate
- Taxable Capital Gain = Capital Gain x 50%
- Undepreciated Capital Cost EOY = Undepreciated Capital Cost on Beginning of Year – CCA Claimed
The HPbii calculator is the most common real estate analysis calculator on the market, and is programmed to handle most financial
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