Gross rent multiplier – The ratio of the price of a real estate investment to its annual rental income before accounting for expenses such as property taxes, insurance, and utilities. For a more extensive list, here is our full list of real estate terms & definitions. Knowing your market like the back of your hand sets you up for success. Review the concepts of Corporate Finance as taught by Professor Aswath Damodaran. Print that out and make sure to take it on the go, that way you can be as prepared as possible. Investing in real estate isn’t rocket science but does require doing your homework. If you have no luck there, try entering the key word “commercial property inspection” into your favorite search engine. Now let’s say our local tax rate is 50 mills, which means its $50 per every $1000 or .05 or 5%. It’s hard to give you an exact number since every state varies. In order to find a property tax rate, you must multiply the assessed value with the mill rate. Qualify your accountant by verifying that he or she has commercial real estate accounting experience, not just single-family residence accounting experience or general business experience. The formula for finding commission in a traditional commission split is pretty simple, just times whatever percentage you have by the total price of the house. All you do is multiply .28 to her monthly income. All ad valorem taxes are based on the determined value of the item being taxed. Discount points – Discount points also known as mortgage points are prepaid interest. Net listing – A net listing is when an agent agrees to sell an owner’s property for a set minimum price. The gross rent multiplier calculation is easy. So from there, all we do is multiply $166.67 by 6, which equals out nicely at $1,000. The 28/36 Rule states: a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service. Lastly, and luckily with mill rates in most real estate math problems, you will almost always be given the rate. As many of you know, agents are licensed salespersons who work under a broker. These fields are two different animals, two different languages, and two different consumers. This game is only for big-time players. You can’t avoid it. Although your state sets statewide property tax rules, your local government handles the administration and levying of the tax. Do proper due diligence. In commercial real estate it doesn’t matter where you start, and it doesn’t matter if you only want to devote part of your time to do it. So when it comes down to commission splits, it is split among all appropriate parties. Zackary Smigel is a real estate professional with a love for teaching, based out of Pittsburgh, PA. Now it’s Your Turn, Start Doing Real Estate Math Problems Now! All you have to worry about is property price, gross rental income, and the GRM itself. rentals and … Instead, hire a real estate attorney. Market conditions change. A property’s market value is $280,000. Appraisal – An appraisal is an estimate of approximate worth of something. So do your research or contact your local tax assessor for complete details on property tax exemptions. Return to Tags List; Top Tags. Property tax is a real estate ad-valorem tax, which is paid by the owner of the property. Due diligence can be broken up into three main specialized parts: physical, financial, and legal. Personal Finance; Real Estate Investing; ... Commercial Real Estate Investing For Dummies Cheat Sheet. Real estate, like the rest of life, does have risks. Verify each dollar of income reportedly coming in and verify every dollar reportedly spent on the property by reviewing actual billing receipts. Equity – Equity is the difference between the market value of your home and the amount you owe the lender who holds the mortgage. Commercial real estate investing is riskier. Since the seller paid the annual taxes, we know it’s based on the year. Trust me, I understand. Thinking about becoming a commercial real estate investor? Mill rate – The mill rate is the amount of tax payable per dollar of the assessed value of a property. Contracts imposed on the property, such as employment contracts, service contracts, and warranties, all need to be scoured over with a fine-toothed comb. And…. Commercial real estate is many things, so knowing some common misconceptions about it can keep you straight amidst the confusion. Have expert market knowledge. Usually taxes, insurance, and maintenance are all added to the monthly lease payment. Robert S. Griswold, author, teacher, and a successful real estate investor, is an active, hands-on property manager with a large portfolio of residential and commercial rental properties. Escrow – Escrow is a way for money and property to be transferred from one party to another through the use of a neutral, third-party agent also known as an escrow agent. Following are some of the key principles that we cover more in-depth in the book: Copyright © 2019 Eric Tyson and Robert S. Griswold. So if the property had a monthly rental income of $2,000, times that by 12, giving you an annual income of $24,000. The assignment rate for the house is 30%, with 27.86 mills. If it didn’t, it probably wouldn’t be as fun. Remember 28/36. Lastly, remember the percentage comes off the interest. There’s no rule, rhyme, or reason stating that you must first invest in residential real estate in order to make the leap into commercial real estate investing. A handful of sites is bound to pop up. Appreciation – Appreciation is any gain in the value of a property over time from any cause. Real Estate Investing For Dummies covers tried and proven real estate investing strategies that real people, just like you, use to build wealth. This is useful for agents to work with clients to determine what loans they can qualify. The assessed value is found by multiplying the assessment rate by the current market value. Anything over the minimum price belongs to the agent as commission. We recommend that you get deeply involved in the financial aspect of due diligence. Things like knowing how many square feet are in an acre, or how to find annual GRM, is critical, and agents do need to know how to do that. Triple net lease – “Triple” means three additional costs will be added to your base rent. A commission is a fee paid to an agent for performing a transaction. Well, luckily for you, you are already in the right place! Then just treat the rest of the problem like before! Answer: 23 paying tenants worth of rent! Property tax is one of the most common real estate math problems you’ll see on the real estate exam. Before you take your real estate license exam, it’s important that you understand the difference between similar-sounding terms. Thinking about becoming a commercial real estate investor? Brokers, on the other hand, are able to work independently. Only the rich need apply. By far, the best way to find a qualified accountant is by referral. Remember find out your state rates for deductions and practice up and you’ll be a master at property tax problems. Its assessment rate, which is established by the local government, is 10%. So for example: If you sell a house for $200,000 with a commission of 5%, the total commission would be $10,000. Here is a list of real estate math definitions that are essential for both obtaining your real estate license and taking the real estate exam. Certain residents may complicate your […] Please don’t have a family law attorney represent you when purchasing a large shopping center. Thanks for reading, until next time! By understanding both, you are already a step closer to acing the exam and understanding real estate math! The best way to find a property inspection specialist is through a referral by an individual or a company that has experience with this part of due diligence. As for selecting a title/escrow company, that’s a little easier than selecting an attorney. So in almost all cases, real estate investors want a lower Gross Rent Multiplier. Know where you are in the real estate cycle. For the physical part of due diligence, where you actually walk around and inspect outside and inside the property, you should hire a professional inspection company. So your GRM is 8.33. What’s more risky? But it all depends on the agreement the agent has with the broker. A self- made millionaire, he has mentored thousands of investors. The issue with gross rent multiplier is it is a limited rough measure in that it does not consider the cost of factors such as utilities, taxes, maintenance, and vacancies. You bet it is, but risk is a facet of doing business — any business. Which is the seller’s monthly real estate tax. It seemed too complicated, and it had entirely too many buttons. Owning and leasing residential real estate requires that you comply with a host of federal, state, and local laws. An example is if a woman wants to buy her first home. You had no idea how to use it. So it’s worth noting, all commission must be paid directly to the broker, then the broker splits the commission with his/her agents.