Loan To Value (LTV)

The ratio of the amount of loan available on the property to the price.

Cash on Cash Flow

The ratio of the total costs of acquisition to the property's cash flows.

Pre-Tax Cash Flow

Cash flows taken before income tax is assumed.

After Tax Cash Flow

Cash flows after income taxes are paid from monies.

Gross Rent Multiplier

The ratio of the total price of the project to the gross scheduled income without regard to vacancy factor or expenses.

Debt Coverage Ratio

The property's ability to service the debt. Expressed as a #. NOI/ADS.

Annual Debt Coverage (ADC)

Annual amount of interest and principal paid on debt.

Captalization Ratio

Annual amount of interest and principal paid on debt.

Internal Rate of Return (IRR)

The amount of return on each dollar invested as it stays in the investment (uneven cash flows).

Intial Investment

Down payment and other costs of acquisition.

Gross Scheduled Income

Total possible rents, not accounting for vacancy or expenses.

Calculating
Real Estate Investment Ratios

Below are some of the most common ratios used to analyze investment ratios. Please know that there is no fool proof investment ratio that can be applied to all investments to determine the overall quality of an investment product. A complete investment analysis should look at alarge variety of factors weighing the pros and cons of each investment as compared to the goals of the investor. If you are unfamiliar with a term, please note the definitions on the left.

Napkin Tests

Napkin Tests are quick, simple tests used to determine initial investor interest in a property.


1. Gross Rents Multiplier (GRM)

GRM= PRICE
GSI (Gross Scheduled Income)

2. Cash on Cash (C/C)

Cash on Cash can be analyzed from pre-tax and after-tax standpoints; please use the one that works bes for you.

C/C= PTCF (Pre Tax Cash Flow)
II (Initial Investment)

3. Captalization Rate (Cap Rate)

Cap Rates are a great way to analyze an investment because they account for expenses and base the investment solely on the net operating income and the price. Cap Rates are a good initial way to determine if an investment has too many expenses to allow cash flow.

Cap Rate= NOI (Net Operating Income)
Price

4. Net Present Value (NPV)

Net present value is a useful indicator that helps an investor determine how much more or less they can afford to pay to get their desired rate of return over a specified amount of time.

The formula is quite complex and as a result is not included on this page.


5. Internal Rate of Return (IRR)

The Internal Rate of Return accounts for the amount initially invested, the cash flow during a specified amount of time, and the future resale value of a property and then figures a return-per-year percentage on the initial investment. The downside is that future cash flows are simply estimates. However, the numbers reflect more accurately on the value of a property.

As with the Net Present Value, many factors are taken into account and require the use of a financial calculator. As a result, we do not put a formula on this page.

If you have questions about
real estate investing ratios, we would be glad to help.