• Best used when derived using actual income and expense numbers from the previous year • Beware of pro forma numbers
When to use it: In context with institutional investors. Gross yield uses the same values as rent-to-cost.
NO. 3 GROSS RENT CALCULATOR
NO. 5 DEBT SERVICE COVERAGE RATIO (DSCR)
Sale Price / Gross Annual Rents Example: Sale Price = $500,000 Annual Rents = $50,000 Gross Rent Multiplier = 10 ($500,000 / $50,000)
Net Operating Income / Annual Debt Service Example: NOI = $120,000 Annual Debt Service = $100,000 DSCR = 1.2 ($120,000 / $100,000) When to use it: To evaluate the viability of an invest- ment from a lending perspective. What you need to know: • Banks use DSCR to predict whether a borrower is like- ly to repay a loan. • Compares an investment’s income to the amount of the loan payment (interest and principal)
When to use it: When looking for a quick sign a poten- tial commercial deal (multifamily or otherwise) is worth considering. What you need to know: • Does not take operating expenses into account • May be calculated using sales price or total cost (includ- ing rehab and acquisition)
• Most bank lenders want DSCR to be at least 1.2
NO. 4 CAP RATE
(Net Operating Income / Total Cost of Property) x 100 Example: Net Operating Income (NOI) = $80,000 Total Cost = $1,000,000 Cap Rate = 8.0 ($80,000 / $1,000,000) x 100 When to use it: When you
NO. 6 THE 50% RULE
Gross Rents X 0.5 = Approximate Annual Operating Expenses Example: Gross Rents = $200,000 50% Rule: $200,000 X 0.5 = $100,000 (Approximate Annual Operating Expenses) When to use it: When you need a fast estimate for operating expenses.
need a way to compare the re- turns on different investment properties. What you need to know: • Cap rate does not include debt servicing costs • Can be calculated using different definitions of cost and NOI
PRO FORMA: Calculations that present financial results, either real or possible, for a potential investment. Note: Seller pro forma estimates tend to be too optimistic to be reliable.
> Continued on :: PG 96
Andrew Syrios is a real estate investor and blogger with Stewardship Properties. Learn more at
StewardshipProperties.com or email Andrew@stewardshipproperties.net.
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