Real Estate Math Questions & Cheat Sheet (May 2024) 50+ (2024)

Understanding real estate math formulas are as equally as important as learning your definitions. With many math formulas, it’s best to practice yourself, but we’ll get to that later— this a full list of real estate math formulas in their most basic form. For more on each one, keep scrolling down below.

Commission

Most, if not all, real estate agents make money through commission. A commission is a fee paid to an agent for performing a transaction. A commission is usually a percentage of the property’s selling price, although sometimes it can be a flat fee.

As many of you know, agents are licensed salespersons who work under a broker. Agents cannot work independently, and therefore are prohibited from being paid a commission directly by consumers. Brokers, on the other hand, are able to work independently. So it’s worth noting, that all commission must be paid directly to the broker, then the broker splits the commission with his/her agents.

Normally real estate agents represent a buyer or a seller. So when it comes down to commission splits, it is split among all appropriate parties. Those parties include listing agents, their brokers, the buyer’s agent, and their broker too. But it all depends on the agreement the agent has with the broker.

For our sake (as well as what shows up on the real estate exam), we will be doing traditional commission splits. 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.

So for example: If you sell a house for $200,000 with a commission of 5%, the total commission would be $10,000. From there with that $10,000, it is then divided accordingly. That part, as mentioned before, varies.

It’s also important to note that the fee comes out of the cost of the home; it is not an additional fee. So, for example, if you sell that house for $200,000, the buyer still pays $200,000, then the seller just subtracts the commission from the total. So the seller takes home $190,000.

Gross Rent Multiplier

Gross Rent Multiplier is 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. More specifically, its a measure of the value of an investment property that is obtained by dividing the property’s sale price by its gross annual rental income.

Gross rent multiplier is used in valuing commercial real estate. 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. It is useful for comparing and selecting investment properties where depreciation and numbers are similar.

The gross rent multiplier calculation is easy. All you have to worry about is property price, gross rental income, and the GRM itself. The formula is Gross Rent Multiplier = Property Price / Gross Rental Income. Here is an example.

Let’s say you have the following information:

a 4-unit building with an asking price of $200,000 and gross annual rents of $24,000. Utilizing the formula, we can take the property price and divide it by the annual rental income.

So it would be: $200,000/$24,000 which = 8.33. So your GRM is 8.33

It’s also important to note the exam may try and throw you off and tell you the monthly gross rental income, rather than the annual. For that, just convert it (by multiplying by 12). So if the property had a monthly rental income of $2,000, times that by 12, giving you an annual income of $24,000. Then just treat the rest of the problem like before!

Lastly, if you haven’t figured it out already – Gross Rent Multiplier is the number of years the property would take to pay for itself in gross received rent. So in almost all cases, real estate investors want a lower Gross Rent Multiplier.

28/36 Rule or “The Mortgage Rule of Thumb.”

The 28/36 Rule states: that 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. Lenders typically want no more than 28% of your gross monthly income to go toward your housing expenses, including your mortgage payment, property taxes, and insurance. Once you add in monthly payments on other debt, the total shouldn’t exceed 36% of your gross income. If your debt-to-income ratio exceeds these limits on a house, you may not be able to get a loan, or you may have to pay a higher interest rate.

An example is if a woman wants to buy her first home. Her gross income is $4500 a month or $54,000 a year. According to the 28/36 rule, she would need to spend less than $1260 in housing costs a month to qualify for most loans. All you do is multiply .28 by her monthly income. This is useful for agents to work with clients to determine what loans they can qualify. Remember 28/36.

Discount Points

Discount points, also known as mortgage points, are prepaid interest. If you (a borrower) want a lower monthly payment and have enough money to purchase some discount points, it’s not a bad idea.

Points can be expensive, and they are separate from a borrower’s down deposit. So if a borrower takes out a $100,000 loan at 7% interest and puts $15,000 down and buys two discount points. You would have to pay all that and an additional lump sum for the points.

The purchase of each point generally lowers the interest rate on the mortgage by up to 0.25%. Typically, one discount point covers a 0.25% percent change in the loan rate. However, lenders are free to set discount points at any level.

It’s usually a good rule of thumb to purchase discount points if the homeowner is going to own the house for more than ten years, as generally around that many years you break even.

Lastly, remember the percentage comes off the interest. So you’re not getting 0.25% off that $100,000 you’re getting 0.25% off that 7%, which lowers your monthly payment.

Calculating Property Tax, Assessed Value, and Mill or Millage Rate

Property Tax, Assessed Value, and Millage Rate typically come hand and hand, and understanding each one is crucial to understanding all three. Property tax is one of the most common real estate math problems you’ll see on the real estate exam.

Property tax is a real estate ad-valorem tax, which is paid by the owner of the property. All ad valorem taxes are based on the determined value of the item being taxed. In order to find a property tax rate, you must multiply the assessed value with the mill rate.

The assessed value needs to be found before you can compute property tax. The assessed value is found by multiplying the assessment rate by the current market value.

The mill rate or millage rate is the amount of tax payable per dollar of the assessed value of a property. The term “millage” is derived from the Latin word “millesimum,” meaning “thousandth,” with 1 mill being equal to 1/1,000th of a currency unit. As used in relation to property tax, 1 mill is equal to $1 in property tax.

So in order to find the property tax rate: you need the assessed value and the mill rate. In order to find assessed value: you need the assessment rate and market value. Lastly, and luckily with mill rates in most real estate math problems, you will almost always be given the rate. If not, all you have to do is convert, which is as simple as multiplying by a decimal.

Once you have all three, you can calculate your property tax! Here is an example:

So let’s say we own a house that has a market value of 100,000. Its assessment rate, which is established by the local government, is 10%. We would then take 10% of $100,000, which is $10,000; this is our assessed value. This means that $10,000 is how much our property is worth (for taxation purposes).

Now let’s say our local tax rate is 50 mills, which means it’s $50 per every $1000 or .05 or 5%. As we established earlier, our property has a tax assessed value of $10,000 in order to find out the final tax rate all you have to do is multiply your assessed value by .05. So 10,000$ times .05 gives us 500$. So our property taxes would be 500$ a year.

Calculating Property Tax Deductions

States vary in property tax rates and deductions very as well. Widows, legally blind people, service members, and other particular groups get deductions; this aspect varies from state to state. For example, legally blind people get a $1,000 deduction in Connecticut but only get a $500 deduction in Florida. Although your state sets statewide property tax rules, your local government handles the administration and levying of the tax. So do your research or contact your local tax assessor for complete details on property tax exemptions.

Calculating property tax deductions is not too bad if you understand how to calculate regular property tax. All that is added is one more step! That one step is before you calculate your final tax rate, you have to subtract the deduction from the assessed value. Here is an example:

*For this example, we’ll be utilizing some generic numbers for the deductions to show you how the process works. These numbers are not accurate, so make sure to find out your state and local deduction numbers afterward.

A property’s market value is $280,000. The assignment rate for the house is 30%, with 27.86 mills. The homeowner qualifies for the widow tax exemption ($1,000). Find the annual property taxes.

$1,312.38

$2,312.38

$2,340.24

$2,540.24

First things first is our assessed value. Remember how to find that? Simple. $280,000 times .3 which is $84,000. Our new assessed value… Here is where those exemptions come in. Since the homeowner has the widow tax exemption we have to subtract $1,000 from $84,000. Which is $83,000. Lastly, we have to convert our mills through division by 1000. Which gives us 0.02786. Finally, we can multiply our converted mill rate by the new (new) assessed value. So 0.02786 times $84,000 which gives us $2,312.38 as our final answer.

Remember find out your state rates for deductions and practice up and you’ll be a master at property tax problems.

Proration

Proration is the allocation or division of money items at the closing. Proration mainly comes into play when a seller prepays their home taxes for the year. Since they paid for the full year and are selling it, the buyer will then owe the seller the remaining months of taxes. The easiest way to break this down is by an example.

This is a common question you’ll see on the real estate exam.

Marissa buys a property and closes on July 1st. The seller prepaid the property’s annual taxes of $2000 for the year. How much does Marrissa owe the seller in real estate taxes?

The first thing you want to look for is any terms specifying when, terms like annual, monthly, or quarterly. Since the seller paid the annual taxes, we know it’s based on the year. So the first thing we do is divide $2000 by 12, which is $166.67. Which is the seller’s monthly real estate tax. From there, we look at what month closing occurs in. They closed in July. This means Marissa owes the seller for the months of July, August, September, October, November, and December. Which is a total of 6 months. So from there, all we do is multiply $166.67 by 6, which equals out nicely at $1,000.

Meaning Marissa owes the seller $1,000 in real estate taxes.

Ready to get started?

Now that we’ve covered pretty much everything you need to know you may be thinking what is the best place to get started?

Practice your little heart out, and if for some reason you are still struggling, look into our real estate exam prep course down below, which comes with videos covering every aspect of the exam (including real estate math).