Real Estate Math

by Jordan Fabel | Last Updated: June 15, 2021

Real estate math plays an important role in every real estate transactions. You don’t need a genius-level math skill, but you do need to understand certain math concepts. You divide, subtract, multiply, and add every time you write a contract or complete comparative market analysis. When you’re a real estate agent, there’s no way to avoid math. And every state’s real estate license exam includes a math section.

The number of questions in the math section varies by state. You can generally expect to see between 5 to 20 math questions on the state real estate exam.

You might think math isn’t that important in real estate. After all, you’re concerned with buying and selling property. Why do you need math for that? It’s because issues requiring the use of math arise all the time in real estate.

Some of the most important math concepts in real estate include:

1. Converting measurements: As a real estate agent, you have to deal with volume measurements, area measurements, and linear measurements. It’s often necessary to convert one type of measurement into another. And one simple math mistake could cause a major problem.
2. Understanding percentages, fractions, and decimals: This is basic math that everyone learns in school. But when you’ve been out of school for a while, even the most simple math problem can challenge your brain. Brushing up on your understanding of percentages, fractions, and decimals will help when doing real estate math.
3. Understanding real estate math formulas: Certain formulas are often used in real estate. Because these formulas are common, real estate agents are advised to understand them. These formulas include the Simple Interest Formula, the T-Bar Method, The Gross Rent Multiplier (GRM), the Loan to Value Ratio (LTV), and the Commission Formula.

Not as Intimidating as it Sounds

Real estate math sounds intimidating to most new real estate agents – especially the formulas. But you can learn to do well in real estate math. You might not love it or even like it, but you can learn to do the math well enough to get your job done.

Time spent practicing math problems and concepts is time well spent.

Terms Used in Real Estate Math

To avoid feeling overwhelmed, you can start learning terms you’re likely to see when doing real estate math. Here are some of the most common terms you’ll encounter.

• Board Foot: A board foot is a unit of cubic measurement for lumber. It is equal to one inch thick by one-foot square. One foot square is when a square object is one foot on all four sides.
• Decimal: A decimal refers to the number 10 or tenths. A decimal is made by adding a period (called a decimal point) between two numbers. For example, the number 532 becomes a decimal when you add a decimal point between the 3 and the 2 to get 53.2.
• Fraction: A fraction is a fragment or disconnected piece of an item. For example, 1/2 is exactly 50 percent of something.
• Denominator: The denominator is the bottom number in a fraction. For example, 4/5 is a fraction. And the number 5 is the denominator.
• Numerator: The numerator is the top number in a fraction. In the above example, 4/5 is a fraction. The number 5 is the denominator, and the number 4 is the numerator.
• Equivalent fraction: An equivalent fraction looks different from another fraction but has the same value. This idea is confusing to many people. An example is 2/4 and 3/6. Both fractions have a different numerator and denominator, but both fractions are half or 1/2.
• Front Foot: This method prices commercial real estate based on the number of feet in road frontage that it has. Road frontage is the space between a vacant lot or a building and the public road that it faces.
• Linear Foot: A linear foot is the same as a regular foot. It’s just a different term.
• Running Foot: The measurement of a piece of wood, but without considering its width or thickness. Basically, it’s the length.

Math Formulas for Use in Real Estate

You’ll need to understand math formulas to pass the state real estate exam. These formulas will also appear often when you’re dealing with property. It’s best to memorize these formulas so you can perform them at a moment’s notice.

Top real estate math formulas include:

• Loan to Value (LTV) Ratio: APV ÷ MA
  Lenders use this to determine the amount of risk involved with issuing a mortgage. APV is the approved property value, and MA is mortgage amount. A high LTV means the lender is taking on a high level of risk.
• Gross Rent Multiplier: Property Price ÷ Gross Annual Rental Income
  This formula is used to predict how many years it will take before a property pays for itself in rent received.

Formulas for Property Taxes

• Property Tax Rate: The formula is Assessed Value x Mill Rate. This formula is used for property taxes. For example, say the assessed value of a property is $10,000. And the mill rate is .0425. That’s 10,000 x .0425 which equals $425.00 property tax. Mills are always used for property tax rates. A mill is a unit that equals one-tenth of a percent.
• Assessed Value: The formula is Assessment Market x Market Value. This formula also helps determine the property taxes for a property. The market value is how much the property is worth on the market. The assessed value is a percentage of the market value and is based on similar property sales, location, and an inspection.

These are only a few of many formulas you’ll encounter. Make sure to study so you’ll become familiar with these formulas and others.

Measurements and Conversions

Measurements and conversions are important when dealing with real estate. You’ll often have to make conversions on the spot, so it’s important to master this skill.

Here are some linear measurement conversions to know for real estate purposes:

• 1 square mile = 640 acres
• 1 acre = 43,560 square feet
• 10 square chains = 1 acre (a chain is a unit of length that equals 22 yards or 66 feet).
• 360 degrees = one circle
• 90 degrees = 1/2 circle
• 3 feet = 1 yard
• 1 mile = 5,280 linear feet
• 1 rod = 16 1/2 linear feet (a rod is a unit of length)
• 1 chain = 4 rods
• 1 link = 7.92 inches
• 4 rods = 100 links
• 1 mile = 320 rods
• 1 hectare = 2.471 acres
• 12 inches = 1 foot

Knowing these conversions makes your job as a real estate agent easier. For example, you might read a contract that says a piece of land is 3 hectares. But your client might not understand what hectare means. You can let them know that 3 hectares is another way of saying 7.413 acres.

Understanding Percentages

Percentages are everywhere in real estate. From the amount of commission, an agent determines how much a property buyer needs for a down payment.

A percentage is a fraction of 100. Take 4 percent, for example. When you have 4 percent of an item, it’s like saying you’ve split that item into 100 parts. And the 4 percent is 4 of those 100 parts. When working with percentages, the position of the decimal point and numbers is important. One mistake could drastically change the value of everything.

For example, .01 is the same as 1 percent. But .001 is .1 percent. And .0001 is the same as .01 percent. Omitting a zero or writing a decimal point in the wrong place could cause all kinds of measurement problems.

Percentages are such a tricky subject until a real estate math formula is specifically for working with percentages. It’s called the T-Method, and its purpose is to make working percentage problems easier. Make sure to learn this formula and refresh your percentage skills before taking the real estate exam.

There are several math resources to help you learn real estate math. Real Estate Math Demystified and The Real Estate Math Handbook are two highly recommended books.

Jordan Fabel

Covering different 'paths' that people's lives can take. Creative, foster parent, ticket dismissal, you get the idea. Exploring the requirements, certifications, exams, and obviously, approved courses along each path. I, personally, am the high school dropout son of two teacher parents. So how did I get here? That story is coming soon!