TOOLS & RESOURCES

TOOLS & RESOURCES: FAQ

Capitalization Rate Formula

What is a Cap Rate?

The Capitalization Rate (Cap Rate), more commonly known by its abbreviation "cap" rate, is widely used to evaluate the worth of investment properties and calculate potential returns on investment.

The cap rate reflects your investment property's rate of return as measured by the amount of income you expect the property to produce.

This measurement can be more simply described as the ratio of net operating income to property asset value.

A cap rate is generally expressed as a percentage, with a higher percentage indicating a better rate of return but also an increased level of associated risk.

The following formulas are applied in the cap rate calculator to determine the Capitalization Rate for a property:

Capitalization Rate = Net Operating Income / Purchase Price
Net Operating Income (NOI) = Gross Operating Income − Operating Expenses

Return on Investment Formula

Return on investment (ROI) is presented in percentage terms and is a measurement of the loss or gain that is generated from an investment as a ratio of the total amount that was initially invested.

You can use the ROI calculator to compute the ROI in five simple steps:

The results generated by the ROI calculator include both the ROI and the annualized ROI.

You can use these figures to compare and contrast the returns that were yielded on different investments.

The basic formula for calculating ROI is as follows:

ROI (%) = [ (GI - CI) / CI ] × 100
Where,
GI is the gain from investment, CI is the cost of investment.

Example: If you bought $10,000 worth of the stock on February 3rd 2016 and sold it for $12,000 on September 20th 2017, you would have a gain of $2,000 which is 20%.

ROI (%) = [ ($12,000 - $10,000) / $10,000 ] × 100

ROI (%) = 0.2 × 100 = 20%

Loan to Value (LTV) Calculator

What is Loan To Value or LTV?

This term is used by the finance industry. It describes the proportion of your home value that your mortgage takes up. So, it shows the value of your first mortgage in percentage terms against your property value.

How to work out the LTV

This is a simple calculation. Take what you want to borrow (or already owe) and divide by the value of the property. This is best shown by way of an example:

Property value = $300,000
Mortgage = $225,000
LTV = $225,000 divided by $300,000
LTV = 75%

When would CLTV come in to play?

If you have more than one mortgage or loan secured on your property, then you may need to consider the Combined Loan To Value or CLTV. This shows your combined debt as a proportion of the value of your home. So, you consider all loans that may be secured on your property.

Calculating Combined Loan To Value

Now we look at all of the loans secured on a property as a proportion of the overall value of that property. Again, an example brings this to life.

Property value = $300,000
First Mortgage = $205,000
Second Mortgage = $45,000
Third Mortgage = $20,000
CLTV = $205,000 plus $45,000 plus $20,000 divided by $300,000
CLTV = 90%

DSCR Formula

What is a DSCR?

The Debt Service Coverage Ratio (DSCR), is the single-most significant element to take into consideration when analyzing the level of risk attached to an investment property or business. By calculating a DSCR, a lender will be able to determine whether the net income generated by a property or business will comfortably cover loan repayments, including payments on fees and interest as well as principal.

The importance of the DSCR to your prospective business loan is clear: it is the financial measurement used to decide whether you should receive a loan based on the level of cashflow your business generates and whether this is adequate to cover the loan costs.

To calculate the DSCR, yearly net operating income (NOI) is divided by the yearly debt service of a property. The yearly debt service is equal to the total funds paid towards principal and interest repayments on all a property's loans over the course of a year.

Use the following formulas to determine the Debt Service Coverage Ratio:

Net Operating Income (NOI) = Gross Operating Income − Vacancy Loss − Operating Expenses
Debt Service = Yearly Loan Payments (Principal + Interest)
Debt Service = Loan Amount * Interest Rate / 100 / [1 - (1 + Interest Rate / 100 / 12) (-12 * Loan Term) )]
Debt Service Coverage Ratio (DSCR) = Net Operating Income / Debt Service

What is a Business Loan

Business Loan Calculator

Just like any other kind of loan, a business loan is borrowing money from a lender, most commonly a bank, with the full intention of paying it back in the future. Although unlike other loans, there are some tax issues and tax-related assessments when it comes to taking out a Business Loan.

Reasons to Take Out a Business Loan

While taking out a personal loan for a new stereo may seem like a silly move, there is a variety of reasons as to why someone should take out a Business Loan.

Start-Up Businesses: If you are considering starting up a new business but are unable to get the funds together to start it up, a start-up loan is the way to go.
Expansion: If you have a current company and it is going well, it's a good idea to consider expanding. Whether this may be purchasing larger office space, increasing staff numbers, or upgrading technology.
Business Failure: This is one of the most common and unfortunate reasons. If you've spent years building up a company from scratch, it's hard to let it go, especially when you think of it as your legacy. If their business is failing and they are in need of funding to help get it back up and running to its full potential again, business owners will take out a loan.