Real estate has long been a reliable source of income, and even modern millionaires say that it's still the best investment to turn towards. But getting started in real estate investments isn't as simple as buying a few houses.
In fact, you have to constantly analyze your return on investments and other metrics. So what are those metrics, and how do you track them effectively?
That's what we're here to look at today. Read on to find out more about how you can track real estate metrics.
Cash Flow
After you pay all the operating expenses associated with your real estate properties, you get your cash flow. This is the amount of money you have left after all those dues are paid each month.
For example, if you had a rental income of about $1,000, you're probably going to pay off some mortgage fees, property taxes, insurance fees, and maybe some repair costs. Let's say that adds up to about $800.
That leaves you with a cash flow of about $200. This is a key figure when analyzing your overall rental ROI and rental income.
Cash-on-Cash Return
If you want to gauge how well your real estate properties will perform over time, a cash-on-cash return is a good place to start. It's essentially our annual cash flow divided by the initial cash that you invested upfront.
Say you paid about $20,000 in a down payment for the property, closing costs, or other costs. You also bring in about $150 each month in cash flow.
Multiply your cash flow for 12 months. This gets you a cash-on-cash return of about 9%. In other words, you get a 9% return on your real estate investment each year based on the money you put down initially.
Net Operating Income
If you own rental properties, net operating income is a measurement of how much rental income you get without considering vacancy and operating expenses. It's very similar to cash flow, but for rental owners.
To get net operating income, or NOI, you add up rental income and other income and subtract vacancy losses and other operating costs. If you own multiple rental properties, this is a good way to compare between them.
Cap Rate
There's also the capitalization rate or the cap rate. This is the estimated rate of return for any given investment property and can be used to look at your overall ROI.
To get your cap rate, multiply your net operating income by 12 months and then divide it by the purchase price for the property. An $85,000 house with an NOI of $500 will get you a cap rate of about 7%.
Cap rate is similar to cash-on-cash return but it doesn't factor in any loan expenses. It also looks at the purchase price of the home in its totality as opposed to just the amount of money you put in.
Appreciation
Finally, there's appreciation. This is the increase in monetary value in your property over time. If you're investing in a property for cash flow, appreciation isn't too big of an ROI factor.
Even then, your property could very well increase in value over the course of ten to twenty years. Keep an eye on appreciation if you ever want to sell your property.
Understanding Real Estate Metrics
Keeping track of real estate metrics doesn't have to be a cumbersome process. Use this guide to help you understand what the most important ones are and how they'll help you track your ROI.
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