Calculations for analyzing real estate investments become increasing more complicated and inaccurate as assumptions increase.
For example, a real estate metric might be Rent on the property. This is a primary input, one of the least complicated and most one of the most accurate metrics you can have.
However, if you use Rent to calculate Gross Potential Income (GPI), you’ll need to use Rent and Other Income (another primary input) to calculate GPI.
Annual Gross Potential Income
|+||Annual Other Income||+||$0|
|Annual Gross Potential Income||=||$27,720|
Gross Potential Income is how much total income the property could possibly produce from all sources.
For Typical 25% Down Payment Gainesville, Florida Rental Property we take the total amount of rent they could collect and any additional income they might also get from the property.
The rent for Typical 25% Down Payment Gainesville, Florida Rental Property is estimated to be $2,310 per month or $27,720 per year. We'll use the annual amount of $27,720 for our calculation and we will, for now, ignore vacancies... we'll deal with vacancy when calculating Gross Operating Income.
We're estimating $0 in other income from the property.
Some common examples of other income might be: profits from on-site laundry (especially in multi-family), pet rent, renting out extra spaces on the property (like an extra garage or storage unit) or things like that.
That means that Typical 25% Down Payment Gainesville, Florida Rental Property has a Gross Potential Income of $27,720 per year.
That means that GPI is a compound calculation requiring more than one input introducing complication and additional inaccuracies (two inputs each with their own level of possible inaccuracy).
The farther from primary inputs you get with multiple compound inputs, the more complicated and potentially the more inaccurate the calculation can be.
Some examples of primary metrics for real estate investments are:
- Property Purchase Price/After Repair Value
- Property Square Footage
- Other Income
- Property Taxes
- Property Insurance
- HOA Fees
- Landlord-Paid Utilities
- Other Expenses
- Property Management
- Mortgage Payments
- Mortgage Interest Rate
- Mortgage Balance
- Private Mortgage Insurance
- Down Payment
- Rent Ready Costs
You know it is primary when you can’t show a formula to calculate it. To paraphrase Popeye, “it is what it is.”
Secondary metrics are metrics calculated based on two primary metrics.
Some examples of secondary metrics include:
- Price/Sq Ft
- Rent/Sq Ft
- Gross Potential Income
- Operating Expenses
- Total Cost to Close
You know it is a secondary metric when the formula to calculate it is made up entirely of primary metrics.
Tertiary metrics are metrics calculated based on one or more secondary metrics.
Some examples of tertiary metrics include:
- Gross Operating Income
- Net Operating Income
- Cash Flow
- Cash on Cash Return on Investment
- Cap Rate