Real Estate Math Study Guide

Percentage to Decimal Conversion

Converting a percentage to a decimal involves dividing the percentage value by 100.

IRV Formula

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)

Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.

Gross Rent Multiplier (GRM)

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.

Capitalization Rate

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.

Net Operating Income (NOI)

Net operating income (NOI) is the annual income generated by an income-producing property after deducting operating expenses, but before deducting mortgage payments, income taxes, and depreciation.

Loan Qualification Math

Loan qualification math involves calculating the debt-to-income ratios that lenders use to determine whether a borrower qualifies for a mortgage. The two primary ratios are the front-end (housing expense) ratio and the back-end (total debt) ratio.

Proration Calculations

Proration calculations divide shared expenses such as property taxes, insurance, HOA dues, and rent between buyer and seller at closing based on the number of days each party owns the property.

Commission Splits

Commission splits refer to the division of the total real estate commission among the listing and selling brokerages, and then between each broker and their respective agents. Commission rates and splits are always negotiable.

Area Calculation (Square Footage)

Area calculation involves determining the square footage or acreage of a property using geometric formulas. Key conversions: 1 acre = 43,560 square feet, 1 mile = 5,280 feet, 1 section = 640 acres.

Transfer Tax Calculation

Transfer tax is a tax imposed on the transfer of real property ownership, typically calculated based on the sale price and paid at closing. It is commonly expressed as a rate per $100, $500, or $1,000 of the sale price.

Annual Interest Calculation

Annual interest is the total amount of interest charged on a loan or investment over a year.

Monthly Interest Calculation

Monthly interest is the portion of the total annual interest that is paid or accrued each month.

Determining Ownership Days

Determining ownership days involves calculating the number of days each party (buyer and seller) owned the property during the relevant period (usually a year). This calculation is crucial for accurate proration.

Proration

Proration is the process of dividing expenses or income between the buyer and seller at the closing of a real estate transaction. This ensures each party pays or receives only their fair share based on the period of ownership.

Calculating Daily Rate

Daily rate calculation involves determining the cost or income per day by dividing the total amount by the number of days in the period (usually a year or a month). This is a fundamental step in proration.

Property Value (based on Cap Rate)

In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).

Capitalization Rate (Cap Rate)

The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.