Income Property Ratios Definition and Formulas

The ratios are an essential tool to evaluate Income Property investments.  Nonetheless, it is important to remark they are not the only factors to consider when you buy Revenue properties; the location and its potential, the general condition of the building and potential to increase the revenues are crucial factors to add up to your investment analysis.

Please notice that small plexes such as duplex, triplex and 4plexes should be evaluated differently. Usually the ratios are useless because the owners live there and the income is low. Small plexes are great for first time buyers because its possible to afford a more expensive property getting extra income to help pay their mortgage. Factors such as the location and its potential, the general condition of the building and potential to increase the revenues take special relevance.

Ratios and formulas

Gross Rent Multiplier (GRM):

This ratio shows how many times the effective gross income represents the value of the property.

=    Value of the property

      Effective Gross Income

Net Rent Multiplier (NRM):

This ratio shows how many times the net operating income represents the value of the property.

=    Value of the property

      Net Operating Income

Average Unit Price:

Average unit price. 

=    Value of the property

          Number of units

Operating Expense Ratio (OER):

This ratio gives the gross effective income that is used by operating expenses. Gross Effective Income 

=    Operating Expenses

     Effective Gross Income

Loan to Value Ratio (LVR)

This ratio gives the value of the property proportion that comes from external creditors.

=    Mortgage Balance

    Value of the property

Debt Coverage Ratio (DCR)

Measures the extent to which net operating income can cover the debt service.

=    Net Operating Income

           Financing Cost

Break Even Ratio

This ratio gives the minimal occupancy rate for which expenses are covered by gross income.

=    Expenses + Financing Cost

=      Gross Potential Income

Capitalization Rate (Cap. Rate)

It's a measure of the ratio between the cash flow produced by a property and its capital cost (the original price paid) or alternatively its current market value. (Net operating income / value (or selling price) = Capitalization Rate).

=    Net Operating Income

       Value of the property

Cash return on Cash (ConC):

This ratio represents the equity return rate of the owner based on his personal tax rate if a tax rate has been specified. The mentioned equity return illustrates the return rate before and after capitalization following the first year of acquisition. (See financial Forecasts for the following years).

=     Cash Flow before and after Capitalization

                        Down Payment

Internal Rate of Return

Discount rate for which the actualized liquidity values generated by the property are equal to the actualized withdrawal values necessary to carry out this investment.