Real Estate Math Formulas

Question 1

Variable (Index) Lease

Answer 1

(New Index ÷ Original Index) x Original Rental Rate = New Rental Rate

ex: Property is rented at $12 a square foot at an index of 1.6. The index increases to 1.9. What is the new rental rate
1. 9 ÷ 1.6 = 1.1875 x 12.00 = 14.25

Question 2

Equity

Answer 2

Current Market Value - Mortgage Debt = Equity
ex: Market value of a home is $350,000; the outstanding mortgage balance is $165,000
$350,000 - $165,000 = $185,000

Question 3

Loan-to-Value Ratio (LTV)

Answer 3

Loan Amount ÷ Sale Price = LTV

ex: $425,000 ÷ $650,000 = .0653 or 65% LTV

Question 4

Gross Rent Multiplier (GRM)

Answer 4

Sale Price ÷ Gross Monthly Rent = Gross Rent Multiplier (GRM)
ex: An investor purchases a building with two duplexes for $279,000. Each duplex rents for $950 per month.
$279,000 ÷ $1900 = 146.84

Question 5

Estimate Market Value based on GRM

Answer 5

Rental Income x Market Area GRM = Estimated Market Value
Multipliers are determined for each local area. If three houses in a neighborhood had an average GRM of 145, then an appraiser could apply the following formula to find a property’s value based on its rent:
$2100 (Monthly Rent) x 145 (Area’s GRM) = $304, 500 (Estimated Market Value base on area’s GRM)

Question 6

Gross Income Multiplier (GIM)

Answer 6

Sale Price ÷ Gross Annual Income = Gross Income Multiplier
Gross Annual Income x Area GIM = Value
ex: A commercial property property was purchased at $575,000. It’s annual rental income and income from other sources total $62,000.
$575,000 ÷ $62,000 = 9.27 for a GIM of 9

If the gross annual income of a commercial building is $84,000 is the local area GIM is 8; then to estimate the value of the building, the following formula applies:
$84,000 x 8 = $672,000