Understanding Percentage of Purchase Price in Real Estate Using Microsoft Excel

Percentage of Purchase Price is a term used in real estate investing to measure the ratio of the monthly rental income to the purchase price of a property. It is a quick way to estimate the potential cash flow and return on investment of a rental property.

For example, if a property costs $200,000 and rents for $2,000 per month, the percentage of purchase price is 1%. This means that the property generates 1% of its value in rental income every month. The higher the percentage, the better the cash flow and return on investment.

However, percentage of purchase price is not a definitive measure of a property’s profitability. It does not account for other factors such as expenses, taxes, financing, vacancy, appreciation, and depreciation. Therefore, it should be used as a screening tool rather than a final decision criterion.

Basic Theory:

The percentage of purchase price is a figure expressed as a percentage of the total cost of a property. It is commonly used to calculate expenses such as closing costs, agent commissions, and other fees related to a real estate transaction. The formula for calculating the percentage of purchase price is:

$\text{Percentage} = \left( \frac{\text{Part}}{\text{Whole}} \right) \times 100$

Procedures:

1. Open Excel: Launch Microsoft Excel on your computer.
2. Enter Data: Create a table with the necessary information, including the part (cost of a specific item or fee) and the whole (total purchase price).
3. Use Formula: In a cell where you want the result, input the formula:

$\text{Percentage} = \left( \frac{\text{Part}}{\text{Whole}} \right) \times 100$

Format Result: Format the cell with the formula as a percentage.

Comprehensive Explanation with Scenario:

Let’s consider a scenario where the total purchase price of a property is $300,000, and the closing costs amount to $8,000. We want to calculate the percentage of closing costs relative to the total purchase price.

Example Table:

Description	Amount
Total Purchase Price	$300,000
Closing Costs	$8,000

Excel Formula:

In Excel, if the total purchase price is in cell A2 and closing costs are in cell B2, enter the following formula in another cell (e.g., C2):

$\text{Percentage} = \left( \frac{B2}{A2} \right) \times 100$

Format the result in cell C2 as a percentage.

Calculation:

$\text{Percentage} = \left( \frac{8,000}{300,000} \right) \times 100$

$\text{Percentage} \approx 2.67\%$

Result:

The closing costs represent approximately 2.67% of the total purchase price in this scenario.

Other Approaches:

Excel Functions: Excel provides functions like PERCENTAGE or PERCENTAGEFORMAT that can simplify the calculation.
Chart Representation: Create a pie chart to visually represent the percentage breakdown of different costs in the total purchase price.
Scenario Analysis: Use Excel’s data tables or scenario manager to analyze the impact of varying percentages on the overall cost in different scenarios.