The "V" stands for the Value or Price of a property or asset.
The "r" stands for the rate of return you are working with or want.
The "I" stands for the Net Operating Income of the property or asset.
(The squares in the background are a memory devise representing a "net" for "net" income; the cirlce or "0" that outlines of a property or asset is a memory devise representing "Operating" for "operating" income; therefore, "net" "operating" "income". The IRV formula is usually always used to calculate the ANNUAL benefits for or based on the Annual Net Operating data.
What “income” (or “Net Operating Income”) will this investment “return” (or “give me”)? This is a familiar problem. If I put a chunk of money into the bank or into an “annuity”, how much “income” will I earn each year (“Net Annual Income”). (A similar question can be asked in real estate: “If I use $X of my cash to pay for a property, and the property gives me an annual rate of return of Y%, how much Net Annual Income will I receive?)
In the IRV chart above, cover the unknown, the “I” or “Net Annual Income”, and compute the answer by using the other knowns in the portion of the formula you can still see: “r” TIMES “V”. This formula computes the “Income” (or the “Annual Net Income”) you should receive for your investment.
What is the annual “rate of return” (or “annual simple interest rate”) this investment will give me? Get well-documented operating statements for this investment or property to determine the Net Annual Income this investment will earn you. (Do not include the mortgages or debts you use to purchase the investment.) Know or estimate the “price” of the investment (or the “value” of the investment).
In the chart below, cover the unknown, the “r” or “rate of return”, and compute the answer by using the other knowns in the portion of the formula you can still see: “I” divided by “V”. This formula computes the “rate” (or the “annual simple interest rate”) you will get from the investment.
What is the most I should pay for an investment? Or, what is the Value of the investment? In this problem, you can determine the “maximum price I should pay” for (or the “value” of) an investment. Get well-documented operating statements for this investment or property to determine the Net Annual Income this investment will earn you. (Do not include the mortgages or debts you use to purchase the investment.) Know or estimate the “annual rate of return” (or “interest rate”) of alternative investments. Now, determine the “value” of (or the “maximum I will pay for”) this investment.
Cover the “V” in the chart below, and compute the answer by using teh other knowns in the portion of the formula you can still see: “I” divided by “r”. This formula computes the “Value” (or the maximum price) you should pay for the investment.
Instructions – How to draw this figure if you are listening on the radio: Draw a triangle to remind you that there are 3 important factors in computing the value of an investment. Above the triangle, write “Net Operating Income” to remind you that the “Income” from an investment is “the Income I will receive each year from the investment”). Then in the top of the triangle draw a capital “I”. Under the “I” and about half way down the triangle, draw a horizontal line cutting the triangle in two parts (the upper part, where the “I” is; and the lower part, where we are about to write). This horizontal line represents the "division" part of the formula.
In the bottom part of the triangle we are going to write a letter, a dot, and a letter. In the left hand corner of the bottom of the triangle, write a small letter “r”; next, draw a dot ; and, next, write a capital letter “V”. You should now have something on your paper that looks like the figure above. You have also now set up a simple reminder of how to determine (or compute) the unknown in an investment value problem.
I the capital “I” stands for “income” or “Annual Net Operating Income” – the amount of cash the investment will put in your pocket. And the dot between the "r" and the "V" reminds you to MULTIPLY those known values.
The line which divides the triangle into two parts, an upper part and a lower part, is a mathematical abbreviation which signifies a “division” problem, and means “divide by”. The small “r” stands for the ‘interest rate” or the “annual simple interest rate of return” (or “capitalization rate” of an investment). The “dot” is a mathematics’ abbreviation; it means “multiply”. Then, in the middle of bottom part of the ; and the “V” (the “value” or the “price I will pay” or the “cash I will invest”). You can use the IRV Formula to compute any ONE of these factors, as long as the OTHER TWO are known.