There are a lot of terms involved in real estate investments other than the sale price and rents. For the help of investors to use their money for profit, experts have created a set of factors, calculations, and metrics to minimize the risks of failures that eventually increases the chances of profits.
Successful real estate investors or those who are in the business for a long time learn these numbers and ratios from in and out so they can evaluate their investments quickly and never miss a trade.
Also, know that the metrics we are going to discuss below are completely related to residential investments like houses.
Top Metrics Every Real Estate Person Should Learn
1. Net Operating Income (NOI)
As the name implies, Net Operating Income is the money you earn or make from your property considering the investment. It is a detailed top-tier income statement of the property.
It can be calculated by subtracting your total income and property operating expenses.
It does not include a mortgage, no that is not an operating expense.
It should include an added charge for parking, services fees, or any source of income that you get. Likewise, the operating expenses include legal fees, maintenance costs, tax rates, utility expenses, manager fees, and everything you pay.
The excluded list has capital, mortgage, or interest.
2. Capitalization Rate
Capitalization or Cap rate is the number similar to Return On Investment on stock markets. Only the business varies. It was the stock market and we have it for real estate. The rate is calculated by the income earned from the property and the capital investment amount. If the income you earn is higher than your investment, it is a profit. This is a ratio that tells how much percentage is your profit.
3. Internal Rate of Return
IRR or Internal Rate of Return is the calculation of interest you will get from your invested rental property over the holding time. It is the value of growth that your investment property has the ability to build. The estimation involves net operating income (NOI) and the purchase price so you can find the long-term earnings.
4. Cash Flow
It is the data that tells you how great your investment is doing whether it meets your expectations like you are making a profit or not going the way you expected. It is the net amount of the month-end that is considered after you collected the rent and paid expenses. Let’s say you rent your property for $4000 a month, the expenses take $2000, and your cash flow of that particular property is $2000.
5. Cash on Cash Return
This metric shows the total return money of your real estate investment. In simple words, it is the money difference between your investment and your current earnings. Unlike other above metrics, this value does not include expenses and mortgage values.
To estimate the current return on the property of the total amount of cash, take net cash flow and debt services then divide them by the total cash invested in the deal.
For total cash in, add the purchase price of property and closing costs then subtract the mortgage balance from it, and finally add capital cost.