Dianne Isabel (i) Wilson

Dianne Isabel (i) Wilson

Broker

RE/MAX Advantage Realty Ltd., Brokerage*

Mobile:
519-777-2424
Office:
519-649-6000
Toll Free:
1-855-649-6001
Email Me

Key Calculations for Valuation

  1. One of the most used is Cash on Cash

    "Cash on cash" refers to a metric used in real estate investing to evaluate the return on investment (ROI) generated by the cash invested in a property. It measures the annual pre-tax cash flow relative to the amount of cash invested in the property.

    The formula for calculating cash on cash return is:

    Cash on Cash Return=Annual Pre-Tax Cash FlowTotal Cash Invested×100%Cash on Cash Return=Total Cash InvestedAnnual Pre-Tax Cash Flow×100%

  2. Rent to Value Ratio (RVR):

    • Example: If a property is valued at $500,000 and has an annual rental income of $30,000, the RVR would be calculated as $30,000 / $500,000 = 0.06 or 6%.
  3. Capitalization Rate (Cap Rate):

    • Example: If a property has a net operating income (NOI) of $50,000 and was purchased for $1,000,000, the cap rate would be calculated as $50,000 / $1,000,000 = 0.05 or 5%.
  4. Gross Rent Multiplier (GRM):

    • Example: If a property is purchased for $600,000 and generates an annual rental income of $60,000, the GRM would be calculated as $600,000 / $60,000 = 10.
  5. Net Operating Income (NOI):

    • Example: If a property generates $100,000 in rental income annually and has operating expenses of $30,000, the NOI would be $100,000 - $30,000 = $70,000.
  6. Price per Square Foot:

    • Example: If a property is priced at $500,000 and has a total square footage of 2,000 square feet, the price per square foot would be $500,000 / 2,000 = $250 per square foot.
  7. Cash Flow:

    • Example: If a property generates $3,000 in rental income per month and has $1,500 in monthly operating expenses, the monthly cash flow would be $3,000 - $1,500 = $1,500.
  8. Equity Capitalization Rate (ECR):

    • Example: If the Cash Flow before Tax (CFBT) is $50,000 and the equity invested in the property is $500,000, the ECR would be calculated as $50,000 / $500,000 = 0.1 or 10%.
  9. Internal Rate of Return (IRR):

    • Example: If an investment has an initial cash outflow of $500,000 and generates cash inflows of $100,000 per year for 5 years, the IRR would be calculated to find the rate of return over the investment's lifetime.
  10. Cost Approach:

    • Example: If it would cost $300,000 to build a similar property from scratch, and the property being evaluated has depreciated by $50,000, the estimated market value would be $300,000 - $50,000 = $250,000.
  11. Sales Comparison Approach:

    • Example: If similar properties in the area have recently sold for prices ranging from $400,000 to $450,000, and the property being evaluated has similar features, a sales comparison analysis would help estimate its market value within that range.

These examples illustrate how these calculations are applied in real estate valuation to assess the financial viability and market value of properties.

AttachmentSize
keys to.jpg59.45 KB
vecteezy_close-up-back-view-of-a-business-woman-working-in-the-office_42537549.jpg7.97 MB

Have Questions?