How To Analyze A Real Estate Deal
When you’re considering the purchase of commercial income property you need to know as much as you can about the income and expenses before you even consider making an offer.
There are Four calculations that every real estate investor should utilize to determine a potential income property’s investment quality.
They are the ensuing:
1) Gross Rent Multiplier
2) Net Operating Income
3) Capitalization Rate
4) Debt Service Ratio
Gross Rent Multiplier (GRM):
The gross rent multiplier is a simple method by which you can estimate the market value of a commercial income property. The advantage is, this is very easy to calculate and the GRM can serve as an extremely useful precursor to a serious property analysis, before you decide to spend money on an appraisal.
To Calculate the GRM:
Gross Rent Multiplier = Market Value / Annual Gross Scheduled Income
Transposing this equation:
Market Value = Gross Rent Multiplier X Annual Gross Scheduled Income
Net Operating Income (NOI):
Net Operating Income is a property’s income after being reduced by vacancy and credit loss and all operating expenses. The NOI represents a property’s profitability before consideration of taxes, financing, or recovery of capital.
To Calculate the NOI:
Net Operating Income = Gross Operating Income less Operating Expenses
Capitalization Rate (Cap Rate):
The capitalization rate is the rate at which you discount future income to determine its present value. The cap rate is used to express the relationship between a property’s value and its net operating income (NOI) for the coming year.
To Calculate the Capitalization Rate (Cap Rate):
Capitalization Rate = Net Operating Income / Value
Transpose this formula to solve for the ensuing variables.
Value = Net Operating Income / Capitalization Rate
Net Operating Income = Value X Capitalization Rate
Debt Service Ratio (DCR):
Debt service ratio is the ratio between the property’s net operating income (NOI) for the year and the annual debt service (ADS). Potential mortgage lenders look carefully at the DCR and its future projections, basically they want to know if the property can generate enough income to pay the mortgage in addition to cash reserves and a profit.
To calculate the Debt Service Ratio (DCR):
Debt Service = Annual Net Operating Income (NOI) / Annual Debt Service
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That’s why Winston Rowe & Associates actually wants to speak with clients, so they can truly understand your business and its distinct needs.
The best funding solutions occur when they combine data with consultation and common sense.
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