Loan-to-Value (LTV) Ratio
Measures the percentage of the property's value financed by a loan.
· Formula: LTV = Loan Amount ÷ Purchase Price (or Appraised Value) × 100
· Example: $3,000,000 loan ÷ $4,000,000 purchase price = 75%
Measures whether the property's income is sufficient to cover mortgage payments.
· Formula: DSCR = Net Operating Income (NOI) ÷ Annual Debt Service
· Example: $300,000 NOI ÷ $240,000 debt service = 1.25
Compares properties regardless of size.
· Formula: Price per Square Foot = Purchase Price ÷ Building Square Feet
· Example: $4,000,000 ÷ 10,000 SF = $400/SF
Quick valuation metric based on gross rental income.
· Formula: GRM = Purchase Price ÷ Annual Gross Rental Income
· Example: $4,000,000 ÷ $250,000 = 16.0
Measures annual return before financing.
· Formula: Cap Rate = Net Operating Income (NOI) ÷ Purchase Price × 100
· Example: $260,000 ÷ $4,000,000 = 6.50%
Measures annual cash return on actual cash invested.
· Formula: Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested × 100
· Example: $120,000 ÷ $1,200,000 = 10%
Income remaining after operating expenses.
· Formula: NOI = Gross Operating Income − Operating Expenses
Measures operating efficiency.
· Formula: Expense Ratio = Operating Expenses ÷ Gross Operating Income × 100
Estimate total cash needed to complete a purchase.
· Formula: Cash to Close = Down Payment + Closing Costs + Loan Fees + Reserves
Lender metric independent of interest rates.
· Formula: Debt Yield = NOI ÷ Loan Amount × 100
Occupancy needed to cover expenses and debt.
· Formula: Break-Even Occupancy = (Operating Expenses + Debt Service) ÷ Gross Potential Income × 100