If you want to be a successful real estate investor, you need to learn how to do the calculations that are going to ensure your properties will make money for you, not lose it. Today I’d like to talk about some of the important calculations you’ll need to use in evaluating properties. This can be complex stuff, so I’ll explain it as simply as I can – but don’t expect that you’ll be able to do a complete evaluation after just reading this post. Use it as a springboard for the in-depth research and learning you’ll need to do.

Understanding Return on Investment –ROI as a general definition, means how much you get back for what you put in. Your ROI is your profit, so to speak. In real estate investing, ROI is often a little trickier to calculate – especially if you are doing creative deals like I do. Essentially, if you know how much you actually invested into a property (your capital outlay + total expenses) and how much you received on selling or transferring the property when it left your possession, you can determine your ROI.

Amount of capital remuneration received – total investment made = ROI

Cash-on-Cash Rate of Return –COC rate of return is a term used by real estate investors to compare income fromreal estate investments and rental properties. Your COC return is similar to ROI, except that is takes into account only the amount of capital you invested, not the entire purchase amount. Let’s say you purchase a property for $200,000 and sell it for $220,000, your profit is $20,000 (excluding closing costs, fees, etc.). Your ROI would be 10% on this deal. However, if you only put down $20,000 and financed the rest, your COC is 100% ($20,000 profit on $20,000 invested).

In rental properties, the calculation is made by determining the ratio between the anticipated first year cash flow and the amount of cash invested in acquiring the property (cash flow ÷ cash invested). In today’s real estate investing environment, where it is often necessary or desirable to make all-cash purchases, COC returns have less value than they used to.

Net Operating Income –NOI is a calculation that is used to determine the value of income producing properties. Essentially it is the property’s yearly gross income, less its operating expenses. It sounds simple, and in theory it is. However, the trick with estimating ROI in evaluating a property’s investment potential is in correctly determining its operating expenses.

A property’s NOI is also used in determining its capitalization rate and its debt coverage ratio (DCR). If you can figure an accurate NOI, then you can determine if a property is likely to be cash flow positive, break-even or a drain on your capital account.

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