8 Essential Real Estate KPIs for Property Investment
Real estate investments are big decisions that involve heavy analysis of a variety of factors. Often times, investors will recruit help from their property manager, an accountant, or another investment expert to determine the risks, longevity, and potential opportunity in a specific property.
The process is thorough (if you want to make a safe investment) and is largely based on KPIs, or key performance indicators. These are financial measurements that help to determine or predict the value of a property via different metrics.
These are some of the most popular and useful KPIs for real estate investors. Keep in mind that every KPI has limitations, as they are only estimates and cannot take into account abstract factors that may play a part in the decision-making process or influence the value of a property, such as future market changes.
- Gross Operating Income (GOI)
This is the overall expected income before removing any expenses. It includes all income the property generates, including fees other than rent such as parking or pet fees. This metric displays the total amount of money a property can produce, or the potential monthly value. It is a hypothetical maximum and does not include any unexpected losses such as vacancy.
- Occupancy Rate
One of the biggest income losses is during vacancy, because the property generates no income but still requires operating expenses. Although every property owner tries to minimize vacancy, a 100% occupancy rate is unachievable. It is important to know the previous occupancy rate of the property to have an accurate estimate, even if you plan to reduce the vacancy rate.
- Net Operating Income (NOI)
The NOI is the GOI with operating expenses removed. This is a basic estimate of the profit the property will produce, taking into account vacancies, utilities, insurance, maintenance, taxes, management fees, and all other costs. Note that this number only shows how much surplus money the property can produce on a monthly basis and does not include the initial investment or one-time expenses like major renovations or improvements.
- Capitalization Rate
The cap rate is an estimation of the general value of a property by calculating the NOI divided by the building’s current market value. This is a simple way to compare properties but note the limitations of this figure. It is not calculated with the actual initial investment amount, so keep in mind that this may be more or less depending on the actual agreed upon price and other sale-related expenses or fees.
- Internal Rate of Return (IRR)
This metric takes NOI one step further, offering an estimation of the property’s total profitability. IRR is the long-term cash yield with the initial investment, all cash flow, and property sale value considered. A property with a high IRR is a strong investment. This figure doesn’t include outside or future investment influencers.
- Cash on Cash Return
This figure compares the initial property investment to the expected monthly income. Divide the estimated property cash flow or income by the total investment amount. The end result is the percentage of your investment that you will earn back each month, allowing you to predict how long until your investment makes a net profit. Once again, this does not account for unexpected costs or economic changes. Perhaps you are investing in a specific neighborhood because local renovation and community growth is expected to boost popularity and property value. That is, of course, a valid consideration that may not be reflected in a KPI.
- Return on Investment (ROI)
Analyzing and learning from past investments is an essential part of deciding on future investments. Calculate the profit you made in total from previous property investments and subtract the total investment amount. Also take a look at the NOI and IRR to see how your initial estimates compared with actual expenses and profit.
- Loan to Value Ratio (LVR)
Financial institutions and lenders use this figure to assess risk of a loan. If you need to take out a loan to make the investment, you should calculate this metric. High risk loans may come with additional fees or higher interest rates, increasing the total investment cost.
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