Most beginner real estate investors, during the early stages of their careers, make the mistake of relying on their gut feeling and intuition to decide on the best properties to invest in.
This, however, has proven to be a huge mistake in most cases.
In order to make good investment decisions, it is important to undergo an investment property analysis to come up with accurate results and data to base your investment decisions on.
So, what is rental investment property analytics, what are the most important metrics involved in it, and how can you do it? This blog aims to answer these real estate questions in order to help investors make the best investment decisions.
Rental Investment Property Analytics: What Is It?
What is rental investment property analytics? Rental investment property analytics is the process of analyzing rental properties in order to determine their efficiency for investment. This includes determining the best investment properties in an area, comparing them, and calculating aspects related to their investment’s potential such as the expected profits from each property, their return on investment, and their costs and expenses.
Rental Investment Property Analytics: Rental Yield
“Rental yield is the rate of income return over the cost associated with an investment property, typically expressed as a percentage. It’s a frequently used metric in property data, and it’s important to understand how it is calculated and what it actually indicates.” – Mortgage Choice.
Otherwise known as gross rental yield, it is the main factor that needs to be taken into consideration when doing rental investment property analytics. It should be noted, however, that gross rental yield does not take into account the expenses of the rental property or the mortgage payments related to it.
Gross Rental Yield = (Annual Rental Income / Property Value) x 100
Rental Investment Property Analytics: Appreciation
One of the attributes that are unique to the real estate market, real estate appreciation is the increase of a property’s value over time due to different factors that might affect it, such as the development of the area, leading the property to grow in value beyond its original market value which it was purchased at. While appreciation is usually taken into consideration in rental investment property analytics, it is not a decisive factor to base your real estate investment decisions on.
Most real estate investors refer to appreciation as the “icing on the cake”. This is because on the one hand when appreciation occurs on an investment property, it is always a good thing, and could lead to a greater success on your investment than you were expecting. On the other hand, it is nearly impossible to calculate appreciation or to predict it accurately, which makes using it as a value during rental investment property analytics unreliable.
When used as a value, appreciation is expressed as a percentage of the property’s value and would represent the rate of increase in the property’s value over a set period of time.
Rental Investment Property Analytics: Cash Flow
Cash flow is the main metric that you will want to base your rental investment property analytics on. Cash flow refers to the profit that a rental property makes after taking into account the expenses that are related to the investment property and the mortgage payments.
Related: How to Value an Investment Property
Cash flow can either be positive or negative. A negative cash flow means that your rental investment property is losing money instead of earning money, while a positive cash flow means that you’re earning money through your investment.
This is the main metric used to determine whether an investment property has the potential to earn a profit or not, and all choices that have negative cash flow related to them should be eliminated as a choice, giving you a clearer picture of which properties to consider for your investment.
Rental Investment Property Analytics: Cash on Cash Return
CoC is a metric used in rental investment property analytics to determine your return on investment. Cash on cash is the ratio of the annual before-tax cash flow over the total amount of cash invested. CoC is typically expressed as a percentage, and it is used to evaluate the quality of cash flow or to compare different properties with different cash flows to determine the best one.
Example: If a property has a monthly rental income of $400, and the cash you invested in it (the down payment) is $100,000, then the CoC on that property would be 4.8%.
Rental Investment Property Analytics: Occupancy Rate
When it comes to rental investment property analytics, one of the most important metrics to take into consideration is the property’s occupancy or vacancy rate. Occupancy rate refers to the percentage of time during a year that a rental property is expected to be occupied by tenants, while vacancy rate is the percentage of time that a rental property is expected to be vacant.
This is very important for rental investment property analytics, as the main source of profit for your investment comes from rents that the tenants pay, meaning that any time that your property spends vacant is a time that you’re not earning any money.
Vacancy rate, when included in the calculation of expenses for your rental investment property analytics is expressed as an annual percentage. For example, a rental property with a vacancy rate of 10% is expected to be vacant for 10% of the year, which is included in the calculation as an expense.
Rental Investment Property Analytics: Expenses
In addition to vacancy rate and mortgage payments, there are a number of other expenses that are included in rental investment property analytics.
These expenses can include ANY and ALL expenses that apply to your individual investment, and they may include but are not limited to:
- Repair costs
- Property maintenance
- Property management
Rental Investment Property Analytics: Mashvisor
When it comes to rental investment property analytics, there are several online real estate investing tools and platforms that can be used to do the analysis. But one platform, in particular, delivers high efficiency for analyzing rental and investment properties in general. Mashvisor provides its users with a number of tools that can help them make the best investment decisions. These include a property finder and a heat map function to help investors find properties in their areas of preference, and an investment property calculator tool which allows you to save time and effort which you would otherwise be spending on analyzing properties and doing the calculations by hand, as it provides you with a complete analysis of properties based on data collected from different sources and property comps.
Rental Investment Property Analytics: Conclusion
Rental investment property analytics is a crucial step for any real estate investor looking to invest in a rental property. It is a huge mistake to make an investment without undergoing the necessary analysis to determine the value and efficiency of your investment, and not doing so might result in the failure of your investment and you losing money on it.