Investment Analysis

Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for immediate income or for long term profit purposes. Real estate investors purchase rights to a stream of future cash flows that are expected to be generated by the real estate purchase. The cash flow might come from rental income, from using the property as loan collateral, from cash savings through offsetting otherwise taxable income with tax-deductible losses, or from the net profits upon resale of the property.

To help our real estate investor client better understand and evaluate potential investment alternatives, please feel free to use the tools below for your own investment analysis and decision making.

 

The following investment ratios are the most commonly used and will help you compare your real estate investments to others. 

Capitalization Rate
This measure provides the Capitalization rate (or “cap rate”) is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.

Capitalization Rate = Annual Net Operating Income / Cost (or Value)

Economic Value
Economic value measures the value of an investment from the standpoint of its net operating income (NOI) and a capitalization rate that would attract that specific investor’s capital to the project.

Economic Value = Net Operating Income (specific property) / Capitalization Rate (individual investor)

Market Value
The market value of the subject property is derived by the capitalization rate typical investors have accepted when investing in similar properties.

Market Value = Net Operating Income (specific property) / Capitalization Rate (market)

Operating Expense Ratio
This provides an indication of what percentage of the annual gross operating income (GOI) is being consumed by annual operating expenses.

Operating Expense Ratio = Total Operating Expenses (annual) / Gross Operating Income (annual)

Gross Rent Multiplier
This tells real estate investors the amount that would have to be paid for each $1 of annual gross scheduled income (GSI) generated by the property.

Gross Rent Multiplier = Market Value / Gross Scheduled Income (Annual)

Net Income Multiplier
Net income multiplier (NIM) tells the investor the amount that would have to be paid for each $1 of annual net operating income (NOI) produced by the asset.

Net Income Multiplier = Market Value / Net Operating Income

Break-even Ratio
The break-even ratio (BER) provides investors with the percentage that operating expenses and debt service will consume gross operating income.

Break-even Ratio = [Operating Expenses + Debt Service] / Gross Operating Income

Debt Coverage Ratio
This provides real estate investors information on the extent to which the annual NOI covers annual debt service. A debt coverage ratio (DCR) in excess of 1.0 indicates that there should be net income remaining after servicing the mortgage, whereas less than 1.0 means that there is not enough income generated to pay the mortgage.

Debt Coverage Ratio = Net Operating Income / Debt Service