Whether you’ve been investing in real estate for years now or have just decided to enter into a new real estate career, knowing how to make smart buying choices is key to success. However, to get to this point, you’ll first need to know what type of data to track as you consider various property deals.
Below, we’ll cover nine critical metrics to watch that will help you make more profitable purchases long-term.
Table of Contents
1. Net Operating Income (NOI)
Knowing your Net Operating Income (NOI) is critical when trying to decipher the actual profitability of a property you’re investing in. It’s calculated by taking the total income a property currently brings or expects to bring in after you’ve subtracted all operating expenses.
By understanding this figure while excluding mortgage payments, depreciation, and income taxes, you can more accurately track the income potential of a property even before placing it on the market.
2. Capitalization Rate (Cap Rate)
Capitalization Rate, also known as “Cap Rate,” is calculated by dividing your NOI by the current market value of a property. While not always the case, having a higher Cap Rate usually means you’ll have a great likelihood of seeing a better return on your property as opposed to lower Cap Rates.
Higher Cap Rates can also mean that the property may have a higher risk as well. For example, if you own an older property that’s in a less desirable area, the Cap Rate may only be higher since the purchase price would be lower. However, it may also have a higher risk of maintenance costs, increased vacancies, and less dependable tenants or buyers.
3. Cash-on-Cash Return (CoC)
Cash-on-Cash Return rates calculate all the profits made after real estate investments. This metric is factored in by dividing pre-tax cash flows per you by the total amounts invested. The CoC calculation will include everything from any down payments made on a property to closing costs and any initial renovation expenses.
Knowing your CoC is helpful when you want to compare various properties with new financing options. This gives you an idea of any out-of-pocket expenses you may need and the ROI these investments can bring.
4. Gross Rent Multiplier (GRM)
GRM, or “Gross Rent Multiplier,” is calculated by dividing the purchase price of a property by annual rental income received. This is a relatively easy metric to track and can help to provide a straightforward gauge on the feasibility of initial real estate investments.
However, when calculating and tracking this metric, it’s important to keep in mind that it’s not as useful as other metrics. This is because your GRM won’t take into consideration any operating expenses, vacancies, or additional financing fees.
5. Debt Service Coverage Ratio (DSCR)
Your Debt Service Coverage Ratio is another important metric to consider when deciding how to purchase various real estate investments. This is calculated by dividing your NOI by your total debt service, including principal and interest payments.
This metric helps you determine if the property’s regular income will be sufficient to cover its mortgage payments. If you have a DSCR above 1, this means the property will be able to pay for itself each month. DSCR is commonly used by lenders when reviewing mortgage applications.
6. Loan-to-Value (LTV) Ratio
Loan-to-value Ratio is calculated by dividing your property loan amount by its current appraised value. This essentially reveals how much leverage is or can be placed on a property when making new investments.
Having a higher LTV means the property is viewed as having more value when financed by debt. However, if an LTV is too low, it means you have more equity in the property. This is preferred since it means you’re likely to have smaller monthly payments and reduced financial risk.
7. Vacancy Rate
Your property’s vacancy rate is the percentage of time a property or individual units don’t have any tenants and aren’t producing any income. This percentage is calculated by dividing the number of vacant units (or vacant unit-months) by the total number of available units (or total unit-months) over a specific period, usually a year.
Having a consistently high vacancy rate can be a red flag that’s not worth investing in. It often means there is a low market demand or the pricing for each unit is no longer competitive. It can also point to there being significant issues with the property that need to be addressed to help reduce the amount of vacancy it receives.
8. Operating Expense Ratio (OER)
The Operating Expense Ratio (OER) is a valuable metric you can track that helps to show you how efficiently a property is being managed. This is calculated by dividing the total operating expense by the gross operating income.
OER essentially tells you how much of your income is impacted by regular expenses. Having a lower OER is ideal and typically points to highly efficient property management practices and better expense control. It also means the property is generating a higher net income.
9. Appreciation Rate
The appreciation rate is a measurement of how much a property’s value increases on the market over a certain period of time. This is an especially valuable metric to track as a real estate investor, as returns typically take a much longer time to achieve.
When factoring your appreciation, there is a wide range of things to consider. This includes looking at wider market trends, considering certain local economic factors, and any future renovation plans when calculating your potential appreciation. If you plan to hold onto the property for some time, it’s essential to ensure you can achieve the highest appreciation rate possible.
Get the Most Value From Your Real Estate Investments
The real estate industry can be highly profitable for individuals who know how to make smarter choices. To do this, it’s essential to track the right data at the right times, whether buying, selling, or renting. By calculating and monitoring the metrics discussed, you’ll increase the likelihood of making informed real estate decisions that yield the best positive returns.
Author Information
Author Name: Michael Alladawi
Author Bio:
Michael Alladawi, CEO & Founder of Revive Real Estate, is a Southern California real estate veteran with a proven track record as a builder, investor, and respected home flipper. Michael created Revive Real Estate to share his industry knowledge and help homeowners maximize their profits when selling their homes. Michael’s passion for his work is as big as his desire to create lasting partnerships. For Michael, it all comes down to how much value one offers, both in business and life relationships.
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