When it comes to analyzing the potential of an income-producing property, many investors focus solely on Cash on Cash return. However, to truly understand the return on your real estate investments, it's important to consider a range of metrics. These metrics provide a comprehensive picture of a property's performance and help you compare it to other properties on the market. In this article, we'll explore 18 essential metrics that should be included in your rental property analysis.
Applicability
Before we dive into the metrics, let's clarify which types of investments these metrics apply to. You can use this information for:
- Single-family homes, duplexes, triplexes, or quad rentals
- Multi-family properties with 5 or more units
- Any properties you plan to apply the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method to
Organization
To make it easier to navigate, this article is divided into three sections, each covering different metrics. These sections are:
Gross Income Metrics
This section focuses on pre-tax and pre-expense income, giving you an idea of the property's income potential.
- Scheduled Gross Rents: Reflects the maximum possible annual income from rents.
- Scheduled Other Income: Includes additional income generated outside of rents, like laundry facilities or vending machines.
- Total Scheduled Gross Income: The sum of Scheduled Gross Rents and Scheduled Other Income.
- Vacancy Loss: Calculates the potential loss due to unoccupied units.
- Effective Gross Income: The income you should expect after accounting for vacancy loss.
Net Operating Income and Expense Metrics
This section focuses on the property's expenses and net operating income.
- Operating Expenses: The ongoing costs of running the property, including property taxes, property management fees, and utilities.
- Net Operating Income: The Effective Gross Income minus Operating Expenses.
- Capital Expenditures (CapEx) / Replacements: The sum of all one-time replacement costs for the property's major assets.
- Net Income After Expenses: The Net Operating Income minus Replacements.
Performance Metrics
This section focuses on metrics that indicate the property's profitability and value.
- Cash Flow: The amount of income remaining after subtracting debt service from Net Income After Expenses.
- Property Value: The initial value of the property, determined by market analysis.
- Capitalization Rate (Cap Rate): A benchmark for comparing properties, indicating the expected return on investment.
- Gross Rent Multiplier (GRM): A quick way to assess whether a property is over or undervalued.
- Operating Expense Ratio (OER): Evaluates how efficiently a property is being managed.
- Outstanding Loans & Leverage: Considers the amount of debt and leverage in the property.
- Equity: The property value minus outstanding debt.
- Profit From Sale: The total profit from selling the property.
Internal Rate of Return: The Most Important Metric
The Internal Rate of Return (IRR) is a crucial metric that allows you to compare the performance of an investment property to other investments. Calculating IRR involves discounting the property's cash flows to determine the rate at which the Net Present Value is zero.
These 18 metrics provide a comprehensive view of a property's financial health and help guide your investment decisions. By considering these metrics, you can make informed choices about the potential return on your real estate investments.
If you want to see these metrics in action, check out the example duplex property analysis in our article and video: [Real Estate Investment Strategies: Example BRRRR Analysis](insert link).
Remember, analyzing real estate investments requires thorough due diligence. By understanding these essential metrics, you can confidently evaluate potential properties and make informed investment decisions.