Calculating Daily Rate
Daily rate calculation involves determining the cost or income per day by dividing the total amount by the number of days in the period (usually a year or a month). This is a fundamental step in proration.
To accurately prorate expenses or income, you need to find the daily rate. This is usually done by dividing the annual expense (e.g., property taxes) by the number of days in the year (365 or 360, depending on the question). Once you have the daily rate, you can multiply it by the number of days the seller or buyer is responsible for to determine their share.
If annual homeowner's insurance is $1,200, the daily rate is $1,200 / 365 ≈ $3.29 (using a 365-day year). This means each day of coverage costs approximately $3.29.
Pay close attention to whether the problem specifies a 360-day year (banker's year) or a 365-day year. Using the wrong number of days will lead to an incorrect answer.
Related Terms
Practice Questions
Related Concepts
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
Proration is the process of dividing expenses or income between the buyer and seller at the closing of a real estate transaction. This ensures each party pays or receives only their fair share based on the period of ownership.