To accurately prorate expenses or income, you need to find the daily rate. This is usually done by dividing the annual expense (e.g., property taxes) by the number of days in the year (365 or 360, depending on the question). Once you have the daily rate, you can multiply it by the number of days the seller or buyer is responsible for to determine their share.
If annual homeowner's insurance is $1,200, the daily rate is $1,200 / 365 ≈ $3.29 (using a 365-day year). This means each day of coverage costs approximately $3.29.
Calculating Daily Rate is tested in the Real Estate Math section of the real estate exam. Questions typically present a scenario and ask you to apply the concept. Here are examples of how exam questions are phrased:
Annual property taxes are $4,380. The property closes on March 15. If the seller has NOT paid taxes for the current year, how much does the seller owe at closing? (Use 365 days)
Practice with all 1 related questions below to build confidence in this topic area.
Pay close attention to whether the problem specifies a 360-day year (banker's year) or a 365-day year. Using the wrong number of days will lead to an incorrect answer.
Related Terms
Practice Questions
Related Concepts
Converting a percentage to a decimal involves dividing the percentage value by 100.
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
The gross rent multiplier (GRM) is a quick method for estimating the value of income-producing property by multiplying the property's gross rent by a factor derived from comparable sales. GRM = Sale Price / Gross Rent.
The capitalization rate (cap rate) is the ratio of a property's net operating income to its sale price, expressed as a percentage. It is used to estimate value and compare profitability of investment properties. Cap Rate = NOI / Value.
Frequently Asked Questions
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