A beginner’s guide to maths in real estate investment – Part 1
Investing in real estate can be a lucrative financial decision – given you’ve done your maths right. If you can’t wrap your head around numbers, making the most of your investment can be dicey. Luckily for you, it doesn’t take a maths mastermind to crack real estate –all you need is a little guidance. Here are a few easy formulas to get you started:
Gross Scheduled Income (GSI)
This is the annual income you can expect, given 100% occupancy and timely payment of rent. GSI is calculated simply by multiplying your total monthly rent by 12 (months). In other words, this is your best-case scenario – but remember that reality might not always be the case.
GSI being the ideal income doesn’t account for possible vacancies. Now you might be wondering why we aren’t calculating vacancy, but occupancy here? In real estate, we’re all about finding the silver lining – so if your property is vacant for 3 months of the year, we won’t call it 25% vacancy, but 75% occupancy.
Gross Operational Income (GOI)
Now your GOI is what you are actually going to collect per annum. Find your actual earnings by multiplying your GSI with your occupancy rate and this is how much your property is making you.
Cash flow is basically your monthly income (rent) minus your monthly expenses. It’s imperative to take stock of your expected monthly expenditures to accurately calculate your cash flow. Don’t forget to include:
- Maintenance / repairs: Is there any repair work needed before you rent out the property? Also, if you’re buying an apartment, there might be a regular maintenance fee to pay
- Insurance: Better safe than sorry – this is the motto to live by when you’re investing a significant sum. Get in touch with insurance brokers to protect your property, and factor in the premium
- Property management fees: Unless you’re planning to manage the property yourself, you’d most likely hire a property manager. This becomes all the more relevant in the case of overseas investments
- Property taxes: Taxes can get you when it comes to real estate. Be sure to double check what you owe, unless you’re enjoying zero taxes on your real estate property in Dubai
- Mortgage / loan: If you’ve taken out a mortgage or loan on your property, it’ll probably weigh in as a significant ‘expenditure’. Even though you’d probably recover the sum through your rental revenue, it’s important to account for it in your expenses
- Vacancy: No investor likes to think of the prospect of a vacant property, but you’ve got to be prepared to bridge the financial gap they can cause all the same
Net Operational Income (GOI - Expenses)
Just as the cash flow determines your net monthly income, the NOI calculates your net annual income, ie, your GOI minus your yearly expenses. However, unlike cash flow, the expenses here don’t include mortgages. Operational expenses include everything else from maintenance, repairs, property taxes, to proper manager fees and insurance – essentially, all expenditures related to keeping your property up and running.
Get to grips with these for now, and stay tuned for more useful real estate formulas to help you navigate the real estate market with ease.