## Evaluation Calcs &Terms

#### Cap Rate (Capitalization Rate)

Capitalization rate, also known as cap rate, helps in evaluating a real estate investment and is rate of return on a real estate investment property based on the expected income that the property will generate. This rate can be used to estimate the investor's potential return on investment.

Formula:

Capitalization Rate = Yearly Income/Total Value

#### LTV (Loan to Value Ratio)

The amount borrowed compared to the cost or value of the property purchased. Lenders often require that a loan-to-value ratio not exceed a specified amount because the higher the LTV, the higher the risk to the lender.

Formula:

LTV% = Loan Amount/Price (or value) of property

#### LTC (Loan to Cost Ratio)

Similar to LTV, this ratio is used in commercial real estate construction to compare the amount of the loan used to finance a project to the total cost to build the project. The costs to build are land, construction materials, construction labor, professional fees, permits and so on. If the project cost $1 million to complete and the borrower was asking for $800,000, the loan-to-cost (LTC) ratio would be 80%.

Formula:

LTC% = Loan Amount/(Total Cost to Build)

#### NPV (Net Present Value)

The sum of the present values (PVs) of incoming and outgoing cash flows over a period of time. Incoming and outgoing cash flows can also be described as benefit and cost cash flows, respectively. In a typical real estate investment, the initial investment is expressed as a negative number, and all future cash flows are usually positive numbers (hopefully!).

Formula:

#### IRR (Internal Rate of Return)

The interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.

Formula: This is an iterative calculation solving for r (rate) in the NPV formula above. To solve you try different values for r to get the NPV to 0. (Or better still, use a financial calculator!) The value of r that makes the NPV 0 is the IRR for that project. The IRR factors in the time value of money. i.e. A $1,000 three years from now is worth less than $1,000 today.

#### ARV (After Repair Value)

After Repair Value (ARV) is the projected value of a property after repairs have been made to it, based on comparable properties in the area.

Formula:

ARV% = (Price+Repair Cost)/After Repair Value