You Want to See a Performance
Investors in real estate all like to see one common “show”: the financial performance of their investment property. Real estate investment analysis is the star of the show, displaying breathtaking “moves” and being a diverse little dancer.
What real estate analytics play into making a real estate investment analysis a star? We plan to let you find out. Here, Mashvisor presents to you the real estate performance metrics that are the most important to your real estate investment analysis.
A Quick Prologue
A performance isn’t a performance if the mood is not set and an introduction is not given. There are a few things you should remember when you’re performing a real estate investment analysis.
- We are going to give you a number of real estate analytics tools to assess the value and performance of your rental property. Don’t get overwhelmed! Get to know the simplest real estate performance metrics. Once you are more comfortable with them, move on to the sophisticated bunch. Find what works for you – there is no perfect tool!
- A real estate investment tool’s greatest value is simply by using it. Utilizing these tools to your real estate advantage will make your real estate property analysis journey a lot easier. They will help you cut out many risks in real estate and define what your comfort zone is.
Not to mention the development of your market knowledge and a level up in your expertise. You will find in the real estate business, that the process of doing the actual work will help you become a successful real estate investor, rather than the product outcome itself.
- The next highest value after the use of a real estate analytics tool is comparing it to others alike! Just because you like to use one tool in specific doesn’t mean you neglect the rest! Compare and contrast real estate investment tools. Test their results against one another and get an idea as to why their results differ. This will improve your savviness and sophistication in a real estate investment analysis overall.
So The Show Begins
The curtains are drawn back and the stars of the show are emerging. So let’s see who the dancers are in a real estate investment analysis.
Notice that we split these metrics into two categories. Each category serves a different purpose and provides you with different real estate advantages and results.
Instead of having one big blur of real estate analytics, it makes the best sense to split them up! So let’s get to know the stars of the real estate investment analysis show!
Real Estate Investment Analysis Star Group One-Rules of Thumb
With the “Rules of Thumb” group, you can expect simple, fast, and normally US real estate market-based. All pretty good real estate advantages. However, with every advantage comes a disadvantage. They are normally static, single year based, and pre-tax. Some do balance out their disadvantages, as they take equity growth into account.
First Up- Gross Income Multipliers
Formula: Sale Price ÷ Gross Rental Income OR Sale Price ÷ Number of Units
Strengths:
- Can be monthly or annual-normally annual
- Assumes high comparability of rental properties, especially quality terms (age, state of repair, surplus land, location)
- Assumes similar approaches in calculating rental income
Weaknesses:
- Does not consider investment property costs and expenses
- Is pre-tax & does not take debt service into account
Next Up- Cash on Cash Return
Formula: Cash Flow Before Taxes ÷ Equity (Cash) Investment
Strengths:
- Measures profitability – the relationship between single year’s cash flow and equity invested.
- Takes debt service into account.
Weaknesses:
- Single year real estate investment analysis
- Pre-tax
- Very little recognition of rental income and investment property costs risk factors
- Very little recognition of various qualitative elements of income properties (age, state of repair, surplus land, location)
- Does not take time value of money into consideration
- Does not take debt reduction into account when building up equity.
Related: Real Estate Investing 101: How to Calculate Cash on Cash Return
Follow-Up: Broker’s Rate of Return (the modified cash on cash return)
Formula: (Cash Flow After Tax + Equity Build-up) ÷ Initial Investment
Strength: Takes investment property expenses, taxes, and equity build-up into account.
Weakness: Still lacks to account for qualitative differences between rental properties.
Last But Not Least- Break Even Ratios
Formula: (Operating Expenses + Debt Service) ÷ Gross Operating Income (expressed as a percentage)
Key Takeaways:
- A break-even ratio < 100% indicates the real estate investment has some “cash cushion” against changes in income or expenses. The lower the percentage the better.
- A break-even ratio > 100% means you will have to supplement cash flow with other funds in order to maintain the investment property.
On to the Next Category of Real Estate Investment Analysis Stars-Direct Capitalization
It is no secret that real estate investing is valued for its cash flow. How much cash flow your investment property currently brings in under your ownership along with its projected net cash flow proceeds play into that value. As a full-time real estate investor, you will purchase a property based on its ability to produce cash flow.
These real estate investment tools are all involved in the concept of capitalization. Cap tools convert future rental income or cash flow into a present value, providing you an insight into the variables that play a part in the calculation. If you know the present value of a cash flow real estate investment, you can determine what a good purchase price is.
The last thing you want to do as an investor is paying more than the present value of the real estate investment. Instead, you look to pay less than its current house market value. Knowing the key variables allows you to use them in a “risk of investing in real estate” assessment. Then use those real estate advantages to negotiate with your buyers, sellers, lenders, other investors, landlords, and tenants! Now let’s get onto our stars.
Presenting our First Real Estate Investment Analysis Star- Net Operating Income
Formula: the annual rental income generated by considering all income collected from operations, and deducting all investment property costs incurred from operations.
Key Takeaways:
- A positive NOI means operating income > gross operating expenses. A negative NOI means operating expenses >gross operating income.
- For a real estate investment analysis, NOI is either based on historical financial statement data of an investment property, or on forward-looking projections for future years.
- A good measure of your investment property’s ability to produce an income stream from operation alone.
- Does not consider any financing or tax costs you might run into.
Round of Applause for the Overall Cap Rate!
Formula: illustrates the relationship between how much you invested in the rental property and the NOI earned from that investment (as a percentage.)
Key Takeaways:
- This is the annual rate of return on rental property
- Illustrates the relationship between how much you invested in the rental property and the NOI earned from that investment (as a percentage)
- Cap rates can be US housing market extracted or compared to other real estate investment opportunities.
- A cap rate can reflect the risk factors that come with an investment property compared to other real estate investment opportunities.
Strengths of Direct Capitalization
- It is simple and fast, and fairly reliable when combined with real estate market research.
- Widely popular, accepted, and understood in the real estate business. These tools use the cap rates that can normally be easily extracted from market data.
- Leads to a useful consideration and discussion of risk and risk factors in any particular real estate investment, and their impact on the purchase price and property valuation.
Weaknesses of Direct Capitalization
- Used in the context of a single year’s net operating income.
- Extremely dependant on capitalization rate selection.
- When it comes to dealing with leverage, risk, taxes, and capital appreciation or depreciation, it is not the most precise.
- Assumes there is stability and consistency when it comes to investment property rental income and expenses.
- Normally pre-tax.
- Measures profitability performance, not cash flow (no, it is not the same).
Related: Cap Rate vs. Gross Rent Multiplier: Advantages and Disadvantages
Pssssst…There is a Mega-Tool Trying to Steal The Spotlight
When it comes to your real estate investment analysis, you want the most accurate real estate analytics and reliable projections. Mashvisor can do just that. All you have to do is search for an investment property of your choice, and we are able to give you our accurate projections.
We talked a whole lot of the numbers you need to consider when you are using the real estate investment analysis “stars.” Our platform can give you the projected cash on cash return, cap rate, and rental income. That is just the tip of the iceberg.
Related: The Use of Predictive Analytics in Real Estate Investing
We are the age of digital innovations, one of which includes a real estate investment analysis tool at the tips of your fingers. Rental property calculators are able to instantly produce sophisticated results based on the inputs you make. Guess what? Mashvisor can give you one.
Using our rental property calculator will make those other “stars” of your real estate investment analysis far more accessible. With this efficient real estate property analysis tool, you are sure to have a competitive real estate advantage when you’re completing your real estate business.
Don’t miss out on all the other real estate investment services our product can provide you! Click here to find out more.
Curtain Call-A Standing Ovation for Your Real Estate Investment Analysis Stars
It’s not hard to get lost in between the other performers when it comes to your real estate investment performance. You do however want to take the first step to find which real estate investment tools work the best for you.
What matters the most is your approach to real estate investing, challenging your assumptions, and learning what has an influence on your outcomes. With these real estate performance metrics, you will grow a 6th sense. This development gives you an understanding of where the money is made and where it’s lost in your rental property investment.
No two real estate investors are the same, no two investment properties are the same, and no two deals are the same. Using these real estate investment analysis tools to your real estate advantages puts you on the front page of the newspaper. You want to open the show and get that standing ovation. The more you perform, the better you get at it. Mashvisor is in the audience, cheering you on the whole way.
