If you’re new to real estate investing, you may be wondering about the best ways to measure your performance. After all, it’s difficult to know where you’re headed without an accurate assessment of your performance. Fortunately, there are a few tools that can help you with this.
Take a Look at Your Cap Rates
Short for capitalization rates, this is a method for evaluating the potential returns your property will provide. This formula can even help you before you buy, letting you compare the potential of two properties in different markets. To find the cap rate, divide the yearly operating income that the property generates by the current or assessed value of the property. The lower the cap rate, the higher the return on your investment.
Figure Out Your Gross Operating Income
The gross operating income gives you an accurate tally of what it will cost to manage the property. This formula helps by taking tenant vacancies and credit losses into account. To find the gross operating income for any given property, subtract the vacancy and credit losses from the potential rental income the property will generate. This will give you the adjusted rental income, which you can add to other income sources you may want to include. The final sum is your gross operating income.
Assess Your Net Operating Income
The NOI gives you a more accurate assessment, because it deducts operating expenses and includes fees other than rent that the tenant may pay. This includes parking fees, pet rent, and other monthly fees that you receive in addition to rent payments. While vacancies and credit losses are also deducted here, you should also deduct the costs of property taxes and insurance, maintenance costs, utility costs, and any other extras that you pay out. To calculate your NOI, subtract the cost of vacancies and credit losses from the total potential rental income. Add those other income sources to arrive at your gross operating income and subtract the operating expenses from that sum. The answer will be your net operating income.
What is Your Cash on Cash Return?
Typically applied to commercial real estate, the CCR helps you identify your cash yield. However, you can use this formula to evaluate the performance of any investment property. To find the CCR, simply divide your yearly cash flow (before taxes) by the total cash you have invested in the property.
There are certainly other formulas that can help you get a better handle on your performance as a real estate investor. You may even come up with a few equations of your own. By keeping track of how well each property performs, you can improve with each future investment.