Let’s say the questions says, “John bought a rental house for $237,000. He wants to make at least 8% return on this investment. His mortgage payment is $1,287.65 at 5.5%. How much rent should he charge to meet his financial goals?”
I always ask my students at Demetree School of Real Estate, “What formula are you going to use?”
The ones who are trying to wing it will say, “Well, you take $237,000 times 8% divided by $1,287.65 minus 5.5%.” When that answer doesn’t result in one of the choices, they will try some other combination.
Usually I will interrupt before they get that far and say, “What is the formula? Don’t tell me the numbers. Tell me in words what formula you are using.”
The ones who have studied will say, “Based on the last sentence, this is the IRV formula, so it is income equals rate times value.”
I encourage them to write the formula on a piece of paper, then plug in the numbers right next to that. When you do that, you realize that the mortgage payment and interest rate are problem trash.
To summarize my method:
- Read the last sentence of the question to determine what we are looking for.
- Identify the formula.
- Write the formula on your paper.
- Plug in the appropriate numbers and ignore everything else.
- Then, and only then, do you reach for your calculator.
You may think my method is too much trouble. I guarantee it is less trouble than taking the exam again.
There might be another benefit to learning the formula in words, not just punching numbers in your calculator. Recently, I heard a student say that this was their question on the Florida real estate sales associate exam:
What is the formula for capitalization rate?
a. Income ÷ value
b. Interest ÷ value
c. Value ÷ income
d. Value X income
For the students who learn the formula, this was a super easy question. For students who just punch in numbers without thinking of the formula, this question could be the difference between a score of 74 and 75. In other words, the difference between walking out with a real estate license or coming back next week later to sit for the test again.
By the way, the answer is A.
Please note that neither I, nor anyone in the Climer family, have any affiliation with Climer School of Real Estate. My father, Ron Climer, sold Climer School of Real Estate in 2014. You can find me at Demetree School of Real Estate.