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The Mathematics Of Real Estate

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Some people who are new to the industry might be surprised in hearing that there is actually a lot of maths involved in real estate. Therefore, it is an important thing to get a grasp of if you intend to pursue a career in it and make some serious money.

Maths in the real estate examination

Regardless of what state in America you intend to get your real estate license from, you will be expected to answer a number of mathematics based questions when doing the exam for it. However, the exact amount does vary quite significantly from state to state, with it being around 10 percent in the lower states, and in the region of 15 percent in the higher states. Doing a Real estate practice test will provide you with a good level of insight into the amount of  maths that you can expect to face.

Photo by Scott Webb on Unsplash

Maths in the real estate industry

It is highly unlikely that when working as an estate agent that you will be using mathematics on a daily basis. However, you do need to be prepared and know the maths just in case the need to use it arises. Some of the most common types of mathematics that are required in real estate include the conversion of measurements; percentages, decimals, and fractions; and specific formulas that are unique to real estate. These include things such as the loan to value ratio (LTV) and the Gross Rent Multiplier (GRM).

Loan to value ratio (LTV) = Appraised property value (APV) ÷ Mortgage amount (MA)

Gross Rent Multiplier (GRM) = Property price ÷ Gross annual rental income *

*Gross annual rental income = Monthly rental income x 12

How difficult is this maths?

Although the above formulas may sound difficult and complex, do not let the fancy names fool you – they are not difficult. The idea that real estate contains some mathematics principles is enough to put some people off of pursuing a career in it, but it really should not. There are actually very few concepts that you need to develop an understanding of and they are all pretty straight forward.

It is simply a case of practicing these and getting to a point that you are comfortable enough with them so that you can pass the real estate examination come the end of your training.

Proration

This is the division of the benefits and costs of a financial transaction. In the world of real estate, where large sums of money are involved, proration comes up a lot. For instance, upon closing the sale of a property, proration is carried out on many of the items and some selling fees are even shared between the broker, the seller, and the buyer. These fees include the likes of rent, property taxes, homeowner fees, and interest on loans.

All of this goes to show that there is quite a bit of mathematics involved in the world of real estate and whilst it is not massively taxing, it does require some practice so that you can get the hang of it.