Property investment involves a multitude of metrics that can influence your decision to invest in real estate. Since every investor’s situation is unique, seeking guidance from qualified finance and investment experts is essential to determine the most beneficial metrics for your specific needs.
Here are some important real estate metrics most real estate investors may be able to use to assess the profitability of a real estate deal.
What are the essential metrics for real estate investments?
Gross Rent Multiplier (GRM)
The Gross Rent Multiplier provides a straightforward comparison by estimating the market value of a property. Divide the property’s price by its potential gross annual income to calculate it. While this metric is useful for comparing houses in the local market, it does not consider factors such as operating expenses and property value fluctuations in real estate.
Net Operating Income (NOI)
The Net Operating Income, or NOI, computes the property’s earnings after deducting all expenses, including bills, maintenance costs, property taxes, vacancy periods, and other fees such as property management fees. Essentially, it represents the net profit generated by the property, excluding investor-specific expenses like investment mortgage payments.
Gross Operating Income (GOI)
The Gross Operating Income, or GOI, offers a simple yet effective real estate metric. It represents the total income the property can generate if rented out year-round, with all tenants paying rent on time. You can calculate GOI by multiplying the property’s rental price by 12. While it doesn’t consider other factors, it helps assess the rental potential of a property.
Cash Flow is another important real estate metric, as it indicates the annual profit obtained from the property. To calculate your net cash flow, subtract the total yearly expenses from the total annual rental income. A positive cash flow indicates a profit, while a negative one implies a loss. However, the existing cash flow from any given investment property doesn’t necessarily guarantee it’s future cash flow.
Capitalisation Rate (Cap Rate)
The Capitalisation Rate, or Cap Rate, reflects a property’s potential profitability. You can calculate this rate by dividing the NOI by the property’s cost. As a general rule, a higher Cap Rate indicates the possibility of a lower return on investment.
Internal Rate of Return (IRR)
The Internal Rate of Return, or IRR, gauges a project’s ability to generate profits. It considers cash flow, initial cash investment, and property sale profits to determine the property’s desirability. A higher IRR may signify a better investment opportunity in the real estate industry.
Debt Service Coverage Ratio (DCR)
The Debt Coverage Ratio, or DCR, is crucial for determining if a property can cover its debt costs. Calculate it by dividing the NOI by the annual debt cost. A DCR lower than 1 indicates negative Cash Flow, implying that the property cannot generate enough income to cover the mortgage.
Looking at real estate investment? Have you considered an SDA investment property?
Real estate metrics only form one part of your investment choice in real estate investing. Accessing a rental property that will fulfil your objectives, fit with your investment strategy and remain true to your investment philosophy are all integral components of weighing up your choices.
If your search has led you to Specialist Disability Accommodation properties, let the Apollo Investment team help guide the process. With socially focused outcomes, we are proud to help investors looking to make a benevolent investment in the real estate market.
Connect with us to learn more about becoming an NDIS real estate investor.