Basic Math for Real Estate Investing

Investing in real estate is a means to grow your wealth.  To achieve success with this, some basic math concepts are really important in your decision making.  Many people buy property, and do not stop to consider the basic formulas that are related to the property’s ability to be valuable. It looks like a great deal, and they jump in without taking a moment to stop and crunch a few numbers.  So let’s talk about a few of these numbers.  

Income

If you have a rental property, this income is what you earn from your tenants.  Take everything you receive in rent and fees, add it up and you have your income.  

Rent

$900

Fees

+100

Income

$1,000

Expenses

This is the money going out from your rental.  Expenses often include the mortgage payment, utilities, and maintenance.  Some expenses may not be included in your monthly bookkeeping, such as taxes and insurance.  

Mortgage

$400

Trash

+30

Maintenance

+100

Expenses

$530

Cash Flow

This is where the next level of complex arithmetic enters.  Cash flow is the amount of money remaining after expenses are subtracted from income.  

Income

$1,000

Expenses

-530

Cash Flow

$470

Return on Investment

If you hear ROI thrown around, this is the acronym for return on investment.  ROI is the interest rate on the money you made for your investment each year. The formula is below:

ROI = (ending balance – starting balance) / starting balance

Using numbers, let us say you start the year with an investment of $2,000.  At the end of the year, you have made $1,000, giving you a total of $3,000 if you were to sell you investment.

ROI = ($3,000-2,000) / $2,000 = $1,000/2,000 = .5 or 50%.  

The return on investment with this scenario is 50%.  

All of this math is the basis of any investing.  It is not the only math you should be taking into consideration though.  There are some more complex formulas and figures that you should be assessing, as well as adding certain categories into you expenses and income.  Nonetheless, this gives you a jumping off point as we continue to explore the world of real estate investment.    

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