REAL ESTATE MECHANICS
Income is simply the amount of money that comes in from a property. This math is perhaps the easiest of all: simply add up the amount of rent and any additional fees that comes in.
For example – you own a rental house. The home rents for $1000, and the tenant also pays $25 for the use of the garage.
Your total income was $1025.00.
Income could also include late fees, application fees, pet fees, laundry or other vending machines, or any other value you receive from your rental.
Expenses are simply the things that cost you money on an investment. For example, the garbage bill for a home is $50 per month, the loan from the bank was $500 per month, and maintenance was $100 per month. The total of these three expenses is $650.00.
Your total expenses for this example were $650 for this particular month. Keep in mind that there are many other expenses that you'll face as a real estate investor, including things like taxes, insurance, management, holding costs, capital expenses and various others.
Cash flow is simply the amount of money left over at the end of the month after all expenses are paid. To determine the cash flow, simply subtract the total expenses from the total income:Your total cash flow in the above example property was $375.00 for the month. Let's look at a few more math equations.
RETURN ON INVESTMENT (ROI)
Real Estate MathYour “return on investment” (also known as ROI) is a fancy way of describing what interest rate you are making on your money per year. For example, if you invested $250 and you made $250 from that investment (for a total of $500) over the course of one year, you would have made a 100% return on investment. Similarly, if you invested $5000 and made an additionally $2500 over the course of a year (for a total of $7500) you would have made a 50% return on your investment.
The actual calculation for Return on Investment looks like this:
ROI = (V1 – V0) / (V0), (where V1 is the ending balance and V0 is the starting balance)
A simple scenario for using ROI to calculate an investment return would be as follows: On January 1, you put $1000 into a bank account. On the following January 1, you cash out the account for $1100. Your ROI on the investment is:
ROI = (1100 – 1000) / (1000) = .1 (or 10%)
You start with $1000 and end up with $1100 after a year for a return of 10%.
These simple concepts present the foundations upon which almost all other real estate calculations are based. The rest will come in time, but most calculations are simply related to these.