If you are a new investor, choosing a real estate investment project or managing your expectations from a current one can be challenging for a new investor.
But, when it comes to investing, you need a solid strategy and some metrics to rely on to make your decisions. There is a myriad of ratios and calculators that full-time investors use to make the most of their purchase decisions.
These metrics help them to make sound investment decisions and grow their portfolios. Moreover, rather than trusting the words of others, they can find out the suitability of the investment opportunity by themselves.
As a result, you will often hear investors talking about whats a good IRR or what is the cash-on-cash multiplier and other such metrics in their conversations.
You might not be well-versed in these metrics if you are a beginner. So here are some of the metrics you should know about before venturing into the world of real estate.
- Net Operating Income
This metric shows how much income you can generate from a selected project. It is a form of income statement but is used for property investments. However, many new-age investors often mistake including mortgage payments in their calculations, but one should not do it as NOI must only include operating expenses.
Income from laundry machines, parking spots, and other services must be included in the total income. Property manager fees, legal fees, and other maintenance charges must also be included in the statements.
- Capitalization Rate
The metric helps you calculate the ratio of the original investment and the income produced by the property. It helps you calculate the percentage of the investment value, the profit. Herein, the net operating income is divided by the total asset value.
- Internal Rate of Return
IRR gives you an estimate of the interest you will earn on the overall investment throughout your investment.
It is one of the most effective methods that give you an estimate of the long-term yield.
To calculate the formula, you need NPV, and it is advised that you keep it zero and take advantage of the projected cash flows during the tenure of your ownership.
The best part about IRR is that it presents the net cash value of the money.
Many investors wonder whats a good IRR, so if you are getting an IRR of about 12 to 18 per cent, the project is fruitful.
- Cash Flow
Cash flow is one of the most basic and universal ways of determining any business’s profitability. This metric effectively determines whether your real estate property is generating enough cash for you.
The basic concept is that if you rent a unit in the building for a thousand dollars and the overall maintenance cost per unit comes to three hundred dollars, your cash flow from one rental unit is seven hundred dollars.
It is a simple but crucial metric because if it’s in the negative, then that supply means you will not be able to earn any money from the property and would incur a loss.
These are some metrics you can use to determine the profitability of your next real estate project. These metrics are effective for residential units and investment properties.