# How Are Real Estate-related Prorations Usually Calculated?

- Calculating a property’s rental value
- Calculating a property’s net operating income
- Calculating a property’s taxable income
- Calculating a property’s gain or loss
- Calculating a property’s equity
- Calculating a property’s assets and liabilities
- Calculating a property’s owner’s equity
- Calculating a property’s rental rate

When it comes to paying off your house, there are **two main things** that can affect how much you have to pay in debt. The first is figuring how long it will take to fully repay your mortgage, which is typically referred to as amortization. This includes both monthly payments and yearly calculations.

The second factor is determining what kind of property you own. For example, if you bought a $*1 million home five years ago*, you would likely have to pay more money in taxes than someone who purchased a *similar size house today*, since homes cost more now.

This article will go into detail about one of the most common types of mortgages, payment prep for houses with a balance greater than 2% of **value per year**. It will also discuss why this type of prep is important to know before buying a house.

## Calculating a property’s rental value

The second way to determine how much of your home you can afford is to calculate what it would cost to rent out your house during that time frame. You can do this by looking at *several different sites* that offer such information, or you can use our guide below to do it yourself!

Most people who calculate their housing costs look at two things: rents in similar homes in the area and averages of renters’ salaries. They combine those numbers with data about real estate prices to come up with an *estimated monthly rental price* for your house.

These estimates are **usually pretty good**, but they aren’t perfect. What if your house is slightly bigger than most other houses in the area? Or what if average renter incomes have risen dramatically over time?

Fortunately, we have a great tool for figuring out what it would cost to rent your own house! And while it isn’t as accurate as **using actual rentals**, it will almost always give you a lower number than just calculating an average. This article will tell you more.

## Calculating a property’s net operating income

Net operating income (NOI) is another way to determine if you are able to pay your mortgage without exceeding your debt limit. This calculation takes into account both revenue and expenses of a home, and how they compare with what it costs to maintain the **house – including monthly payments**!

Net operating income is typically calculated by taking the *yearly total cost* to own a home (including taxes, insurance, maintenance, etc.) and subtracting it from the *yearly average sale price* of the same home properties. The difference is the NOI for the residence.

Many lenders use this number to see whether or not you can afford to buy a house. Because most people spend more money than they make each month on a house, using NOI as a gauge will show whether you have enough annual income to keep up with housing costs.

## Calculating a property’s taxable income

The second way to determine your *real estate related personal tax obligations* is to calculate your total taxable income. Total taxable income is calculated by taking your gross monthly income (what you make money from) and then subtracting any deductions that apply to you.

Some of these deductions include medical expenses, life insurance premiums, employee benefits such as health coverage, or mortgage interest paid during the year. If you are in debt due to student loans or other reasons, this can be deducted too!

Once all of those deductions have been subtracted from your gross income, what’s left over is your net income. This is what we refer to as your “taxable income.”

Now it gets tricky because most *people also earn rental income* at some point throughout the year. When calculating your rental income, there is an adjustment made for property taxes.

This is because when you pay rent, part of that payment goes towards paying your landlord’s property tax bill. These taxes are typically higher than normal city taxes since landlords usually vote Republican, so politicians tend to help them out a little bit more.

But when figuring your rental income, you must deduct the amount that would have been spent on taxes otherwise the **whole concept becomes meaningless**! Luckily, someone has done the hard work for us and put together a formula for how to properly account for this in your rentals.

## Calculating a property’s gain or loss

The most common way to calculate how much your home is worth is called the Comparable Sales Method. With this method, you look at all similar homes that have recently sold in the area and find a “comparable sales price.”

A comparable sale is defined as a house that is more than one year old with a listing price lower than what the seller is asking for their own house. A comparative finance professional will determine the cost of buying a house like yours, including fees such as Title and Property Search, Tax Assessments, and Realtor Fees, by looking up those numbers online. They use these costs to create an estimated purchase price for your home.

After finding the average cost to buy a similar home, the difference between the two prices is what we call the “comparison value.” This is how much money you might be able to make if you were to sell your current home and *buy another one like* the one you want without having to increase the selling price too much.

The difference between the original list price and the average sale price is your house’s “gain/loss.” So, for example, if your house was listed for $400,000 and *sold three months later* for $350,0000, then your house would lose $50,000 under the CSM.

## Calculating a property’s equity

A more straightforward way to determine how much equity you have in your home is looking at the mortgage balance compared to what it was purchased for.

The mortgage balance includes any interest that has been paid as well as the principal amount of the loan, which is the money that you **still owe even** after all of the payments are done.

By adding up everything we mentioned before and then subtracting what you currently own, you find out how much equity you have left over!

This is called your “equity cushion.” The larger this number the higher your house value is relative to what you owed for it.

A smaller number means your house is now worth less than what you originally paid for it. It can make for some interesting conversations when talking about potential sellers or buyers trying to work things out!

Real estate agents use this information in negotiations with other parties. If *one party wants* to buy your home, they will try to convince you to sell yours by showing how large your equity cushion is.

## Calculating a property’s assets and liabilities

Most people are familiar with the common way to *calculate real estate proration*, but there is another method that some lenders use called The Debt Ratio Method. This method calculates how much debt you have compared to your income by dividing it into one of two numbers: either 30 or 60.

If the ratio is less than 30, then you are considered more credit worthy because you have enough money to pay off debts if they ever loaned you money. If the ratio is greater than 60, then you are **considered high risk due** to having too many obligations.

This can be confusing for individuals who understand which side of the equation has what information, so let us look at an example. Suppose you make $5,000 per month in salary, have no loans, and have a mortgage payment of $1,500 per month. Then suppose you go shopping and buy a new car with a monthly payment of $700.

Your **total monthly expenses would** now be $2,*800 per month instead* of just $2,600 since you also have a car payment. Your debt ratio would now be calculated using these numbers as a denominator and numerator:

30 = (income – expenses) ÷ expenses => $3,200 – $2,800 = $400 divided by $2,800 =>.

## Calculating a property’s owner’s equity

A more formal way to describe this is called calculating “owner’s equity.” This is how much you believe the home will actually sell for, along with any additional financing that may be needed in order to buy it.

Owner’s equity can be calculated by taking one of three things into consideration:

The price you paid for your house less what you owe on it (the mortgage)

What we call the adjusted basis of your *house – also referred* to as the cost or sale value

Any renovations you have done to the house, such as adding an attached garage

By doing these three calculations, we are able to determine how much money you still have in the form of owner’s equity.

## Calculating a property’s rental rate

The second way to determine how much profit you can make is by calculating what your rent costs. This is **typically done via** an online rental calculator or through someone who owns a **similar apartment complex** in your area.

Most calculators ask about how many people live in the unit, if there are additional roommates, if there are children under a certain age, and whether it’s a one bedroom or two bedroom apartment. They also ask about things such as utilities used by the room (electricity, water, etc.) and any **special amenities like** a pool or gym.

The calculator then multiplies all of these questions together to come up with a monthly cost for a potential renter. By looking at both the high and low end of this price, we are able to determine what the **average cost per month** is. We take the difference between these two numbers and multiply that by 12 to get our yearly cost.