Disclaimer: This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice. Nothing contained on our site constitutes a solicitation, recommendation, endorsement, or offer by ButterflyMX or any third-party service provider. ButterflyMX is not a financial adviser. You should always seek independent legal, financial, taxation, or other advice from a licensed professional.
In order to successfully invest in real estate, every investor should be intimately familiar with real estate metrics. Knowing the different terms for real estate metrics such as NOI and ROI is essential to financing your multifamily property.
In this guide, we’ll define what real estate metrics are and why they’re important. Finally, we’ll cover the top 10 most important real estate metrics and why you should be familiar with them.
This post covers:
- What is a real estate metric?
- Why are real estate metrics important?
- What are the most important metrics in real estate?
What is a real estate metric?
A real estate metric is a quantifiable measure that can be used to estimate a property’s performance in the real estate industry.
There are a wide variety of metrics depending on the type of property, including:
- Industrial real estate metrics
- Corporate real estate metrics
- Commercial real estate metrics
- Residential real estate metrics
What are KPIs in real estate?
KPIs (which stands for key performance indicators) in real estate are measures used to assess the success of a real estate investment or property.
Note: KPIs are the same as real estate metrics. There are a lot of abbreviated terms when it comes to discussing real estate metrics, and there are some cases where two terms mean the same thing.
What is leverage in real estate?
Leverage in real estate is the act of borrowing money from the equity of one of your previously owned properties without selling that property. Then, using that money to purchase a new property.
It’s only considered leverage when you don’t sell your initial investment property to pocket the equity as profit.
Learn how to get started in commercial real estate development:
Why are real estate metrics important?
Real estate metrics are important because they help you determine the current success rate of a property. They can also help you determine when a property will become profitable.
Almost all real estate metrics feature mathematical equations (such as debt divided by monthly expenses) that will give you data you can collect and study while monitoring your investment.
In short, being unfamiliar with basic real estate metrics is like not crunching your numbers correctly — you’re bound to make an error that could increase the risk of your investment.
What are the most important metrics in real estate?
Our list of real estate metrics below isn’t exhaustive. However, it does include some of the most commonly used real estate metrics in the industry. These metrics are especially helpful if you’re new to real estate financing and investing.
The 10 most important metrics in real estate are:
- Return on investment (ROI)
- Net operating income (NOI)
- Capital rate (cap rate)
- Cash flow
- Cash-on-cash return
- Operating expense ratio (OER)
- Capital expenditures (CapEx)
- Loan-to-value ratio (LTV)
- Debt service coverage ratio (DSCR)
- Gross rent multiplier (GRM)
1. Return on investment (ROI)
Return on investment (ROI) measures the profit you make on an investment compared to its original cost.
In real estate, your property’s ROI is the total amount of earnings you receive after subtracting all of your expenditures and loan payments. In short, it’s your reward and the sum of your investment.
After first investing in real estate, it may take a while before you see a positive ROI. If you’ve calculated correctly before going through with your investment, you should have an expected time period for when your ROI will become positive.
Don’t forget your internal rate of return (IRR):
Your property’s internal rate of return (IRR) is very similar to ROI with one key difference:
The IRR is your property’s annual return rate, while your property’s ROI is its current total return.
When calculating real estate metrics, it’s important to distinguish between similar terms like these.
2. Net operating income (NOI)
Your net operating income (NOI) is calculated by subtracting your property’s recurring expenses from the recurring income that it earns. All properties have a number of costs that come with operating and maintaining them. Being familiar with your NOI can help you cut down on operating expenses.
As an investor, you’ll want your investment properties to yield a high net operating income.
Important note: Your NOI includes your property taxes but isn’t calculated with tax deductibles and returns in mind.
Learn what NOI is real estate is and how it works:
3. Capital rate (cap rate)
Your property’s capital rate (cap rate) is an evaluation of your property’s expected ROI along with any possible risk. Cap rates don’t include debt, such as your loan payments. And cap rates are expressed as a percentage (such as you expect a 56% return on your condominium investment).
To calculate a property’s cap rate, divide its NOI by its current market value. Then, multiply that figure by 100.
Remember: You shouldn’t rely on a cap rate alone to determine whether a property is a wise investment. You’ll also want to pay attention to metrics such as its cash flow history.
4. Cash flow
Cash flow is your total monthly profit after every expense and bill is paid off. So for example, if your building collects $10,000 in rent and spends $6,000 each month, your net cash flow is $4,000.
Cash flow is an important real estate metric because it’s an immediate indicator of how well your property is performing.
Depending on your property’s risk level, cash flow might change from month to month. As such, even with many months of successful cash flow, your internal return rate (IRR) could still be negative.
5. Cash-on-cash return
Cash-on-cash return analyzes the total amount of cash you’ve invested into your property versus your return and displays it as a percentage. In other words, your cash-on-cash return equals how much money you’re earning off the cash you invested.
It’s calculated by dividing your yearly income (your IRR) by the total amount you’ve invested so far. This gives you a better idea of how close you are to achieving a positive return on your cash investment.
6. Operating expense ratio (OER)
Your property’s operating expense ratio (OER) measures your operating expenses compared to your operating income.
Operating expenses (OpEx) are all the costs you incur to operate your building, including:
- Maintenance
- Property taxes
- Insurance
- Property management fees
- Utilities
These are necessary expenses, and in most cases, the IRS views them as tax deductible.
And of course, your operating income is the money you make from rent and any other fees the property charges tenants.
To calculate your OER, simply divide your OpEx by your operating income.
Remember: Because operating expenses are tax deductible, you’ll want to keep clear and detailed records of all of them. This might be easy when it comes to payroll, but file management when it comes to billing contractors requires some organizational skills.
7. Capital expenditures (CapEx)
Capital expenditures (CapEx) are one-time expenses that go toward improving a property, not just maintaining it.
CapEx can include:
- Upgrades to security
- The addition of amenities
- Physical renovations of the building and/or individual units
CapEx is not included when you determine your capital rate. One goal of your CapEx spending can be to increase the eventual ROI on your property.
8. Loan-to-value ratio (LTV)
Your loan-to-value (LTV) ratio measures your property’s appraised value against how much your lender is willing to give you.
This real estate metric is commonly used by lenders to determine how much of a risk your investment proposal is. It’s important to calculate your LTV yourself before seeking a loan.
9. Debt service coverage ratio (DSCR)
Your debt service coverage ratio (DSCR) determines your ability to pay your mortgage by measuring your cash flow.
When first starting out with a high-risk investment, you’ll want to pay close attention to this real estate metric. You can easily calculate it by dividing your NOI by the total debt that you owe on your property. Your total debt includes the principal that you owe for your loan/mortgage, interest on your loan, and your tax rate.
If this calculation yields a number higher than one, you’re able to pay your mortgage. For every increment higher than one, that represents your total cash flow.
In contrast, if your calculation yields a number less than one, then you’ll want to consider additional income sources to cover your mortgage.
10. Gross rent multiplier (GRM)
Your gross rent multiplier (GRM) can determine how profitable your rental property could be in the current real estate market.
To calculate your GRM, divide your property’s total estimated value by your IRR. The lower the GRM, the more profitable your property is.
This real estate metric is especially helpful when you compare your property to nearby properties’ GRMs.
Takeaways
- Real estate metrics are the mathematical equations you use to determine a property’s performance.
- Calculating your property’s KPIs correctly can help you make the most out of your real estate investment.
- Important real estate metrics you should know include ROI, NOI, CapEx, and cash flow, among others.
