Real Estate Metrics: What Investors Need to Know
TL;DR - From cash flow to GOI to NOI to depreciation, there are ample real estate investment metrics to help you analyze a potential property. What’s important is that you choose one you love and stick with it.
Whether you’re an experienced or beginning real estate investor, you want to know that your investment is a solid one.
And how do you judge a real estate investment?
Through the various metrics.
No matter what you’re targeting, there’s a real estate metric for you.
These metrics help you analyze a current or potential rental property investment.
So to help you out, we’re going to cover the top real estate metrics, why they’re important, and why to choose a few metrics that are important to you.
Let’s get into it!
Real Estate Investing Metrics
What to Know About Metrics
Real estate metrics are not a one-size-fits-all type of deal.
Which ones are important to you depends on your investment strategy, your values and beliefs, and a million other things that make you an individual.
Your favorite ones might even change as you become more experienced with real estate and get to know your process better.
To help you decide which ones to focus on, we’re going to break down some of the most popular real estate metrics investors use.
The Top Real Estate Investment Metrics
Let’s break ‘em down.
Cash Flow
For some, this is the only thing that matters.
After all, isn’t the goal with rental properties to make money?
Cash flow is what’s left after rent is collected and all expenses are paid.
If your rent collected was $1,200 and your expenses were $800, your cash flow would be $400.
Cash Flow = Total Income - Total Expenses
CoC (Cash on Cash Return)
This is our favorite metric!
It’s simple — if you put X amount of money into an investment, what is the return?
This includes all operating expenses.
Cash on cash makes it simple to see if your money’s working for you properly. It’ll also allow you to judge if an investment is beneficial or not.
To calculate cash on cash (CoC), divide the money you gain each year by the amount you’ve invested. So if you gain $2,500 a year on a property and put a down payment of $20,000, your CoC would be 12.5%
Cash on Cash Return = Money Gained / Money Invested
GOI (Gross Operating Income)
This metric allows you to see what your projected rental income will be for the year, minus potential vacancy.
Imagine you have a two-unit multifamily property. The rent per unit is $800 a month. Your total potential rental income would be $19,200 (($800x2) x 12). Now add a vacancy rate of 8% and your actual rental income is $17,664 ($19,200 x .08 vacancy = $1,536).
After this, you’d add any other income you get from your properties. Let’s say you have some vending machines that get $50 a month. Add this to your effective rental income and you get your GOI, $18,264.
Gross Operating Income = (Total Potential Income - Vacancy Allowance) + Misc Income
NOI (Net Operating Income)
Excluding mortgage, how much does your property make after all operating expenses are paid?
That’s what NOI is. You can think of it as an income statement for your real estate.
Mortgage is left out because it isn’t considered an operating expense.
You’ll include all your expenses, such as a property manager, maintenance, property taxes, and so on.
If your rental property generated a yearly GOI of $15,000 and your operating expenses were $9,000, your NOI would be $6,000.
NOI = Gross Operating Income (GOI) - Operating Expenses
Cap Rate (Capitalization Rate)
The real estate metric that measures your potential return on investment.
Cap rates fluctuate depending on the market, so it’s best to use this metric for properties in a similar style and market.
The higher a cap rate is, the more risk there’s to be had. Normally, large/stable markets have lower cap rates and risky markets have higher cap rates.
Cap rate can be used to determine a number of things, such as NOI and Property Value.
Cap Rate = NOI / Property Value
NOI = Property Value x Cap Rate
Property Value = NOI / Cap Rate
OER (Operating Expense Ratio)
To ensure that you’re maximizing your profits, this is the metric you’ll want to use. It’ll allow you to see how well you control expenses in regard to income.
Simply divide your property’s operating expenses by its operating income.
Maybe you’re property’s operating expenses are $12,500 annually. Your GOI is $16,200. Your OER would be 77.2%. This means that 77.2% of your income is going towards expenses and not into your pocket.
You want this to go down over time so that you’re receiving as much profit as possible. A property with a lower OER is being managed well and the opposite for a higher OER.
Operating Expense Ratio = Operating Expenses / Gross Operating Income
LTV Ratio
You can use this metric to calculate leverage or debt when financing a property.
If you don’t finance your real estate deals, then this metric isn’t for you.
LTV allows you to measure how much you’ll need to finance when purchasing a property, as well as track your equity in a rental.
Generally, you can expect to put down 25% of a property’s value for a rental investment. This leaves you with a 75% LTV.
If the property you want to buy has a price of $125,000 and you put down $35,000, your LTV would be 72%.
Loan to Value = Loan Amount / Property Price
IRR (Internal Rate of Return)
Also called an annualized return, IRR helps you calculate a property’s potential profitability.
It factors in cash flows, purchase costs, sale proceeds, and time value of money (TVM). You can think of TVM as “a dollar now is worth more than a dollar later”.
Higher IRR generally means a better investment.
Computing IRR can be a daunting task, which is why this calculator was created to help you figure it out.
DSCR (Debt Service Coverage Ratio)
This metric helps you compare your property’s operating income to the total debt you’re leveraging.
You want your DSCR to be high so that you have more money to pay operating expenses and potential vacancy with.
To utilize it, simply divide your NOI by your mortgage payment.
If your property’s NOI is $8,000 and your yearly mortgage payment is $4,750, your DSCR would be 1.68.
As a rule of thumb, lenders require a 1.25 DSCR or higher before making a loan.
Debt Service Coverage Ratio = Net Operating Income / Yearly Mortgage Payment
Depreciation
An expense that you can use to reduce your taxable income from your rental properties.
Some investors make a huge mistake by not filing depreciation on their properties. It’s basically free money from the government!
You’re allowed to depreciate your residential property over 27.5 years.
If your property value plus improvements is $200,000, you can claim $7,272 of depreciation each year on your taxes.
How nice is that?!
Depreciation Expense = Property Value (not land) / 27.5 years
Some Advice
Right now, your head is probably filled with all the numbers and formulas of each real estate metric we mentioned.
You might even feel like Einstein, calculating energy, mass, and speed of light.
It’s okay, you can relax now. As we noted above, you don’t have to use every single one of these metrics.
The investment metrics you’ll use are totally dependent on who you are as an investor.
If you want to maximize your tax potential, you might go after depreciation.
If you want to know how much you’re making after expenses, you could focus on NOI.
If you want to control your expenses and increase profit, you can go after OER.
It’s all up to you and your process.
The most important thing is that you focus on one real estate metric for all of your properties. It’ll help you prioritize your investing goals and align each potential property with them.
As you gain more experience with real estate and accumulate rentals, you might change your favorite metric. But for now, choose one that you love and stick with it.
Happy hunting!
How We Can Help You
Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!
At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.
Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.
