What are the common financial metrics used in real estate?
Cap Rate (Capitalization Rate): This measures the return on investment for a property. It’s calculated by dividing the net operating income (income after expenses) by the property’s current value.
Cash-on-Cash Return: This measures the amount of cash flow generated by a property as a percentage of the initial investment. If an investor has placed $100,000 into a deal and is earning $8,000 per year on that investment, then the CoC return is 8% annualized.
Net Operating Income (NOI) measures the profitability of a property. It is calculated by subtracting all operating expenses from the property’s gross income but does not consider any debt service or financing costs. NOI = Gross Rental Income – Operating Expenses.
Gross rental income refers to the total income generated by a property from all sources, such as rent, parking fees, and laundry income.
Operating expenses are the costs associated with operating the property, such as property taxes, insurance, maintenance and repairs, utilities, and property management fees.
Gross Rent Multiplier (GRM): This measures a property’s value based on its rental income. It’s calculated by dividing the property’s sale price by its annual gross rental income.
Internal Rate of Return (IRR): This measures the profitability of an investment over time, considering the time value of money. As money “today” is more valuable than in the future, a higher value is placed on cash-flow received sooner in the investment.
Average Annual Rate of Return (ARR) It is the average return of an investment over a set period. This metric does not consider the time value of money like IRR does.
Equity Multiplier: IT is the projected multiplication of the investor’s initial investment. For example, an equity multiplier of 2x, means doubling the initial investment.
Debt Service Coverage Ratio (DSCR): This measures a property’s ability to generate enough income to cover its debt obligations.
Return on Investment (ROI): This measures the return on an investment as a percentage of the initial investment.
These metrics can help investors evaluate the potential return on investment for a property and make informed investment decisions.
Evana Valenzuela, AB life investor
