Measuring Property Investment Performance: Key Metrics to Know

 It is very important to include service fees, money made from laundry machines, and extra fees for parking spots in the final number. Along with the cost of utilities, operating costs include legal fees, general care, and property manager fees.

What does it mean to have net running income?

One of the main goals of NOI is to help investors figure out if a system is profitable and can bring in money. Through this measure, you can see if the investment can bring in enough money to meet its mortgage obligations.

2. Capitalization Rate (Cap Rate)

The cap rate shows how much money you can make by investing in the real estate stock market. It is found by dividing the property's income by the amount of money that was put into it in the first place. This gives you the property's current value. This number shows how much of the investment's value can be credited to profit.

In what way does the ceiling rate matter?

Most of the time, the limit rate goes up in direct proportion to how risky a purchase is. Because a high capitalization rate naturally leads to higher profits, there is an element of higher risk that can't be avoided. This fact explains why cap rates are different in risky markets like San Francisco and New York City compared to more developed, safe markets like Los Angeles.

This is the Internal Rate of Return (IRR).

The IRR figures out how much of a return an investment of one dollar in rental property will give the owner over the time they hold the property. It reflects the speed at which growth can be made by a certain property. Long-term yield is added to the calculation along with net operating income and buying price.

When figuring out the IRR, set the property's net present value (NPV) to zero and use the expected cash flows for each year of control. "Net present value" means the present value of money without interest that is added on top of it. Most investors use the IRR function in Excel to figure out the ratio because the method is so complicated.

Why is the IRR so important?

IRR metrics can be very different, but most of the time, they are between 10 and 20 percent, based on the type of real estate asset being looked at. Additionally, it gives you a strong indication of how well the property is doing.

Cash flow can be used to figure out how financially stable a group is, or how poorly it is doing. It refers to the amount of money that is left over at the end of the month after rent is paid and other expenses are paid. When you take away the $1,200 in costs, renting a building for $2,000 a month leaves you with $800 in net cash flow. To have Stessa calculate this measure, you can either do it yourself or ask someone else to do it.

5. Cash Back on Cash

The cash on cash return metric is used to measure how much money real estate capital makes generally. In its simplest form, it shows the rate of return on the initial investment of cash. It's different from other real estate investment metrics because it includes the cost of your mortgage and debt payment. This makes it an essential metric.

Why is having cash on hand an important metric?

By testing different ways to return cash, you can find the best way to finance a new investment. It is used to evaluate potential investments and can help figure out what the returns will be in years when big investments are planned.

6. Gross Rent Multiplier (GRM)

By letting buyers compare structures, GRM makes it easier for them to figure out how much a structure is worth. To find the answer, divide the property's buying price by its gross rental income. It is the local market and similar traits that are used to figure out what a "good" GRM is.

Reduce the work you have to do when you report your rental property with STESSA >>7. The Loan to Value Ratio tells you how leveraged an asset is. LTV, or the percentage of the property's current fair market value that needs funding, is important information for buyers who are financing their deals. Still, LTV is the best way to keep track of the value of your assets and portfolio, even if you're not looking for finance. It takes into account both the debt and equity in a property.

What Does LTV's Criticality Mean?

If the lender agrees to an 80% LTV, you need to put down 20% as collateral for the credit. To buy a $100,000 home in this case, you would need to pay $20,000 for closing costs and the down payment. This is equal to an 80% LTV. If the house is worth $200,000 USD and there is a $50,000 down payment, the LTV will be 25% after ten years.

8. The amount of debt service coverage

The Debt Service Coverage Ratio (DSCR) is another important number that creditors look at carefully. The amount of debt that has been accumulated is compared to the amount of working income that has been set aside to pay off debt. To find the DSCR, you need to divide the net running income by the debt payments. This calculation can be done once a year, three times a year, or once a month.

Why is the DSCR so important?

People who have Standard A or B grades as creditors want a DSCR of 1.25 to 1.5. This means that the rental property brings in an extra 25% of income after debt service is taken out. An even better benefit is that if your DSCR is between 1.5 and 1.75, you might be able to get your interest rate lowered.

Based on Occupancy Percentages

Even though it's not making any money, an unoccupied building still has costs that need to be paid. Even though no one is living there, the building's running costs keep going up. A lot of investors look at two-year occupancy rates to find flats that aren't being used and lose money.

10. The rate of physical vacancies

This measure shows how many empty units there are compared to the total number of units that are available. All you have to do to do the math is multiply the number of empty units by 100 and then divide the result by the total number of units. It's clear that this measure is useful when used on both single properties and portfolios as a whole.

Rate of the Economy Being Empty

When there are no people in a place, it loses money. This is called the economic vacancy rate. One way to figure out how much the vacancy cost is to divide the total number of rentals lost by the amount of yearly rent that could have been earned.