Real Estate Math Explained


Real Estate Math Explained

When preparing for your real estate license exam, there is some math that you will need to know.

First, there is the Gross Rent Multiplier, or GRM. This calculation is one of the best ways to easily understand how profitable an investment property is.

The formula for a GRM is: Property Price divided by the annual Gross Rental Income.

For example, if a property is purchased for $700,000 and has an annual gross rental income of $35,000, you would divide $700,000 by $35,000 to come to a GRM of 20.

When a property has a lower GRM when compared to nearby competition, it typically means that investment is more profitable.

To estimate a property’s value, the GRM can also be used. Using the previous example, if we already know that the average GRM of the area is 20 and the rental income is $40,000, we can multiply $40,000 by 20 to come to an estimated value of $800,000.

The next formula you need to know is Percentage Change. This number represents the degree of change in an asset.

The first step is to determine the difference (either an increase or decrease) between the current and comparison value (also called the original value), which is typically the purchase price.

Once you have your increase number, divide it by the original value, then multiply this figure by 100 to come to the Percentage change.

Let’s apply it to an example. A home was bought ten years ago for $200,000. It is now worth $300,000. The difference between these two figures can be found by subtracting $300,000 by $200,000 to come to $100,000.

Now we divide our increase number of $100,000 by the purchase price of $200,000, then multiply it by 100 to come to 50%. This property has a percentage change of 50% over the past ten years.

The third formula you need to know is how to calculate interest. This becomes relevant in real estate when loans are involved.

A simple interest calculation is the principal multiplied by the interest rate multiplied by the time period.

For example the interest on a $300,000 loan at a 4% interest rate over one year would be calculated by multiplying $300,000 by 0.04 by one would be $12,000.

The last main calculation that you need to know is how to calculate commission. Commissions will vary depending on your state and business, but the simple math will remain the same.

To calculate a commission value, you just need a property’s agreed commission rate and sale price. Then, multiply the commission percentage by the sale price or property value to come to your gross commission value.

For example, if the agreed commission percentage of a sale is 5% and the sale price is $500,000, you would multiply .05 by $500,000 to come to a commission of $25,000.

And that is a good overview of real estate math that you will need to know. Keep in mind, in most modern real estate exams, math questions are minimal or not even included at all. However, if you want to become a successful real estate agent, learning the main math formulas of the industry is crucial.

If you want to see some examples of questions that will be on the actual real estate exam, check out our free real estate practice exam. We have been named as the best real estate exam practice for 7 years in a row!

If you need to get your required educational hours done, check out our partners for online real estate education that can be done at your own pace from home or where ever you have internet access.

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