They tried to warn us!

From elementary school through high school and beyond – you will need to understand math.

A lot of us didn’t listen, or perhaps despite our best efforts, just could not wrap our minds around the concepts. 

If you’re looking to work as a real estate agent, you might feel the same anxiety you felt when a test asked you to explain the Pythagorean theorem. You may find yourself overwhelmed by the large figures and extensive acronyms involved in buying and selling real estate.

But fear not! I am here to help you with real estate math. 

In this article, I’ll go over some of the basic real estate math questions, along with some examples of real estate math problems to help you sharpen the skills you need to become a successful agent. 

License Exam Math

Your license exam will include some questions on basic measurement conversions. You’ll want a good understanding of both linear conversions like feet in a mile (5,280) and area conversions like square feet in an acre (43,560). 

I also recommend brushing up on fractions and percentages. Remembering how to do operations like turning a decimal into a percentage (move the decimal to the left two digits, i.e., 0.25 becomes 25%) is a must for passing the real estate exam. 

Loan to Value Ratio 

The loan to value ratio (LTV) assesses how much of the home’s total value a loan covers.

To find it, divide the mortgage value by the total value of the home. A $100,000 home on which a client receives a $90,000 loan would have a 90% LTV, since the loan covered 90% of the total cost (90,000/100,000 = 0.9, or 90%). 

Simple Interest Formula

The simple interest formula calculates the total cost of a purchase when accounting for interest.

The total amount (a) comes from multiplying the principal (p) by one plus the rate of interest (r).

It looks like this: A = P(rt+1).

From my own experience, you also need to familiarize yourself with the math behind things like property taxes and discount points, but if you can handle the multiplication and division involved with simple interest and LTV, then rest assured you can handle those problems easily too. 

Basis Points

A basis point is 0.01%, or 1/100th of 1%. 100 bps is 1%.

Lenders may occasionally talk in terms of basis points. I guess saying “13 basis points” is easier than saying “0.13%”.

Contract Math

Once licensed, you’ll need to understand a few different bits of real estate math to figure out your contracts successfully.

Calculating Down Payments

Real estate requires figuring out down payments in terms of dollar amounts and percentages.

Purchase Price * Down Payment % = Down Payment $

A mortgage requiring a 30% down payment on a $200,000 would need $60,000. 200,000 * 0.30 = 60,000.

Seller’s Net Sheet

The seller’s net sheet clarifies exactly how much money the seller can expect to get from the sale of their property.

A net sheet itemizes costs like commission, real estate agent fees, escrow, title preparation fees, closing costs, and title policy (along with other things depending on the state). Subtracting these costs from the total sale price gives the “take-home” figure. 

Your forms database, like zipForms, may do some of the math for you. Some math, like calculating your title insurance, may be based on a State formula. Many local title companies’ websites have handy calculators for finding the title insurance amount for the net sheet.

Investor Math

You’ll also need to familiarize yourself with some math concepts related to real estate investment.

GRM

The gross rent multiplier (GRM) helps determine how fast a property will get paid off at a given rental price. To find the GRM, divide the total cost of the property – let’s say $500,000 – by the annual gross income — let’s say $50,000. In this case, the property has a GRM of 10 because 500,000 (cost)/50,000 (rent per year) = 10.

Acquisition Price / Gross Annual Rents

The GRM has a few applications. You may need it to determine the number of years it would take to pay off a property (10) or use it to calculate the “fair value” for purchasing a similar rental property in the market. A market with a GRM of 10 means a property that generates $42,000 in gross income annually should cost around $420,000 (42,000 x 10).

Cap Rates

Capitalization rates (or “cap” rates) represent the amount an investor makes on an income property. Expressed in percentages, cap rates come from the net operating income (gross income minus operating expenses) divided by the total acquisition price (i.e. the purchase price).

Net Operating Income / Acquisition Price

For example, a $500,000 property that costs $15,000/year to maintain and generates $50,000 gross income would have a $35,000 net operating income (50,000-15,000 = 35,000). Divided by the total value of $500,000, the property would have a 7% cap rate (35,000/500,000 = 0.07), generating 7% of its value in profit each year. 

ROI

ROI or return on investment speaks to the percentage profit a property generates over its initial cost.

ROI = (Final Value – Initial Value) / Cost

For example, if a client buys a property for $250,000 and later sells it for $280,000, they have returned $30,000 on their investment. (280,000-250,000) / 250,000 = 0.12, or 12%. 

This calculation does not figure in any other overhead costs like maintenance that may subtract from the total profit at the time of sale. 

Instead, investors might consider other related measures of a return on investment. Common but more complicated formulas include the internal rate of return (IRR) or net present value (NPV).

Prorating Taxes

Taxes are prorated on the closing day, which means they get divided accordingly between the previous and current homeowners. This division can affect the closing costs for a home buyer, or the net for a home seller. Your net sheet should prorate these taxes for your seller, and your LE should have estimates of these taxes for your buyer.  

Let’s say the annual tax on a home comes to $2200. If closing is on September 22nd, the 265th day of the calendar year, then you would prorate the taxes by 72.6% as an estimate. 265/365 (the number of days in a year) = 0.726, or 72.6%. Since they lived in the home for 72.6% of the year, they would pay 72.6% of the taxes. 2200 x 0.726 = 1,597.2, so they would pay $1,597.20 in taxes while the buyer would be responsible for the remainder of the year. 

Conclusion

While the real estate licensing exam and real-life contract calculations may use a lot of figures, the actual operations involved require relatively simple math. To make it even easier, I have a list of fantastic calculators that do the real estate math for you. 

But understanding the logic behind these calculations will make you a better agent. Hopefully, by now, you find yourself a little more comfortable with the math behind the dollar figures.