When making the decision to invest in real estate, there is no doubt that numbers matter. However, it is key to look at the right data to help drive any investment choices. The real question therefore is, which metrics truly matter? The simple truth is that certain metrics will often carry more weight, depending on the type of property and the investment goals you have.
The following metrics though get used most commonly by most real estate investors.
Capitalization rates
Also known as cap rates, this metric enables you to predict any potential return you might see on the property in question. To work out cap rates, you need to divide the net operating income you have per annum by the value of the property. Key to know is that as cap rates go up, any return you may see drops.
Cash-on-cash return
One very common metric that carries weight with real estate investors is CCR. Some call it cash yield and it measures your pre-tax cash flow per annum divided by how much you have invested in total. Essentially, it gives a quick way to look at how your investment may perform.
Gross operating income
This is known in real estate investment circles as GOI. It basically allows you to calculate how much capital you need to run a property. GOI takes credits from your estimated operating income and balances them with any losses you predict from tenant vacancies.
Loan-to-value ratio
Also known as LTV by investors, this metric comes in handy when wanting to assess risk. In simple terms, the higher a LTV value, the more risk an investment carries. Higher LTV's could also bring extra costs to the investment, such as the need to take out more insurance on the property.
Gross rent multiplier
Finding simple ways to compare various properties you could invest in is always wise. The GRM metric is a great way to go about this. You calculate GRM by dividing the cost of the property by the predicted gross income per year. GRM usually works best when comparing similar properties in close proximity.
Operating expense ratio
Many investors will use the OER metric to work out how much a property will cost to run before risking their money. To find out the OER figure, you need to calculate the daily operating expenses but ignore any mortgage payments or improvements to capital. Divide this number by the estimated income from rent. The lower the OER figure, the more profitable the investment should be.
Using the right metrics matters
All successful real estate investors know that using and comparing the right metrics can help you profit overall. This is true when first looking at any investment to take on but also assessing any investments performance over time. Metrics like those above can really help you as an investor in real estate but it is key to know what each one measures and how to use them wisely.