Remember in school saying, “but when will I use this in the real world”? Welcome to property management – the real world where math abounds and knowing some easy equations can make the difference to your business success.
Many states require a property management license or a brokers license to conduct rental management. Those licensing classes and tests will want you to demonstrate a level of math competency in order to pass your real estate licensing exam. The below information, resources and linked calculators are supplemental to your licensing textbooks and official state board references.
Note: Formulas below use a slash (/) to represent division and a star (*) or X for multiplication.
Calculation for Rents and Rates
In deciding how much to charge for your rentals (also known as market rent or rental rate), you’ll want to conduct a market rent analysis as well as calculate how much income would be required to meet all the financial obligations of the property while making a profit. In that, you’ll have to take into consideration a minimum rent charge, any concessions you’ll offer, how often and the rate of rent escalations, and other calculations for rents and rates. One such tool is the Gross Rent Multiplier (GRM).
Gross Rent Multiplier (GRM)
The Gross Rent Multiplier (also known as the Gross Income Multiplier) is another quick assessment tool, along with a market rent analysis and other evaluations, to help property managers set rent amounts or investors to decide if a property is over or underpriced.
Gross Rent Multiplier (GRM) = Property Purchase Price / Gross Annual Rental Income
To calculate the Gross Rent Multiplier, divide the property purchase price by the gross annual rental income.
A helpful online calculator can be found here: Gross Rent Multiplier Calculator
Net Operating Income (NOI) formula
The net operating income is the gain or loss over time, and this formula is expressed as a dollar amount. It is used to determine the income produced by a property after taking into consideration all of the operating expenses (but excludes the mortgage).
Net operating income = gross Income – operating expenses
To calculate the Net Operating Income (NOI) add all gross income together, add all operating expenses together, and then subtract the operating expenses from the gross income.
A helpful online calculator can be found here: Net Operating Income : NOI Calculator
Capitalization Rate (Cap Rate)
The capitalization rate is useful to evaluate the purchase price of a new property or analyze a current investment against the current market rates.
Capitalization Rate = Net Operating Income / Current Market Value of Property
To calculate the capitalization rate, add all the operating income together and then divide that total by the current market value (or the purchase price) of the property.
A helpful online calculator can be found here: Cap Rate Calculator – Calculating Cap Rate
Occupancy Rates / Vacancy Rates
Both the occupancy rate and vacancy rate can provide a snapshot of the property performance.
The occupancy rate indicates the ratio of occupancy to the total available.
Occupancy Rate = Number of Occupied Units (or rentable space) / Total Units (or rentable space)
To calculate the occupancy rate, divided the total number of occupied units (or rentable space) by the total number of units (or rentable space).
The vacancy rate indicates the ratio of vacancies compared to the total. This formula can also be used in commercial real estate (CRE) by calculating the rented or vacant rentable square footage divided by the total rentable footage.
Vacancy Rate = Number of Unoccupied Units (or rentable space) / Total Units (or rentable space)
To calculate the vacancy rate, divide the total number of unoccupied units (or rentable space) by the total number of units (or rentable space).
General Math Concepts for Real Estate
As a refresher, it’s also great to know how to calculate changes in value, such as simple measurement conversions or percentage of increase as well as how to calculate tenant prorated rent and applicant debt-to-income ratios.
Common Measurement Conversions
Whether you are calculating the amount of replacement carpeting during tenant turnover, or calculating the rentable commercial space vs the common areas, conversions may be necessary to get the appropriate outcome. The graphic below holds the most common measurement conversions for both residential and commercial real estate (CRE).
Percentage of Increase
Knowing the percentage of an increase is very useful information for real estate analysis to determine the trajectory of your business or deciding how much to increase a rental rate.
Increase = new number – original number
Percent change = increase / original number x 100
To calculate a percentage of increase, subtract the final value from the starting value to get the difference between the two numbers to find the increase. Then divide that number by the original. Finally, to get a percentage, multiply the answer by 100.
Tenant and Applicant Calculations
As a landlord, property manager, or back office manager you will need to be familiar with formulas that help you determine if a potential tenant financially qualifies for your rental property. Pulling a credit report is a snapshot of past and current debts that have been reported to the credit bureaus but might not show the whole picture. Whether you require the applicant to produce bank statements or just employment and income verification, it’s good to know how to calculate a debt-to-income ratio.
Debt to income ratio formula
Debt-to-income ratio = all debt payments / gross monthly income
To calculate the debt to income ratio add together all the debt payments, add together all the gross income (meaning income before taxes), and then divide the debt payments by the gross monthly income.
The debt to income ratio is the percentage of their total debt compared to their total income before taxes. Example: $1200 (debt) /$4800 (income pretax) = .25% In the example, 25% of the tenants income goes towards paying off their debts.
Not only is knowing how to calculate a debt-to-income ratio useful for tenant screening but also for investors as lenders will want to make sure total debt (including payments towards any mortgages) are under a certain threshold.
Prorated rent calculations
Depend on the regulations in your state or your management agreement. There are four ways to calculate prorated rent based on preference of calculations by:
- Number of days in a year
- Number of days in that specific month
- Number of days in an average month
- Flat 30 days (aka a Banker’s Month)
4 Ways to Calculate Prorated Rent + Bonus Tools & Resources
In addition to the above, there are many other financial calculations you’ll need while managing properties and investments, many of those can be done for you in a printable format in your property management software. Most rental management software programs will have reports available to print or save such as:
- Income and Expense Reports
- Vacancy and Occupancy Reports
- Operating Statements
- Category Ledger Reports
- Rent Rolls
- Property Performance Reports
- Deposit Reports
- Owner Statements
and many more
As there are many other practical calculations you may wish to know for your property management or investment business, it’s a good idea to dive into other resources to round out your studies. To help you continue, here is a list of other formulas to consider studying:
Cash-on-Cash (CoC) Return
Debt Service Coverage Ratio (DSCR)
Operating Expense Ratio (OER)
Return on Investment (ROI)
Whether you inherited properties, on the lookout for your first investment, or are looking to open or work for a property management company, get ready for some number crunching in your future. Even if you’ve got a solid background in bookkeeping, have the best property management software, and are a math pro, it’s good review the common formulas and calculations you’ll run into in rental real estate.