If you are a landlord, you will already know that there is much more to choosing a property than its price and the potential income it will produce. There are many metrics that should be understood before investing and now we’re in a time where the profitability of traditional buy-to-let investments is questionable, it’s more important than ever to work these out so you can make a more informed decision. Successful landlords will learn these real estate metrics thoroughly in order to evaluate an investment. The metrics involved can range dramatically from simple occupancy rates to more complex formulas such as internal rates of return.
Whether you are a beginner investor or have years of experience but need a refresh, here are some of the top real estate metrics all landlords should be measuring.
Table of Contents
Gross Rental Yield
Gross rental yield may sound difficult, but it is pretty much one of the simplest metrics available to landlords. The metric shows the property’s profits before any taxes and expenses are deducted. This is represented as a yearly percentage return. In simple terms, the more money your property generates, the higher the gross yield.
The gross yield of a property is important because it helps demonstrate the potential income it will generate before all the complex deductions have been made. Which in other words is how much money the property generates compared to the purchase price.
Net Rental Yield
Net rental yield is another metric to have under your belt when looking for investment properties. The gross yield gives you a top-level overview of the cash generated, but the net rental yield provides an understanding of the actual profitability. This metric will help you to show the yearly profitability percentage after all the expenses have been deducted.
The net rental yield is much more important than the gross yield as it shows you the actual profits you are making each year. The higher the net yield, the more profit you will be making.
Return On Investment (ROI)
Yes, both of the metrics mentioned are important, but nothing compares to the importance of return on interest (ROI). This metric is basically the be-all and end-all of your investment as it shows the overall profit generated from the investment in relation to the amount of capital you need to invest. It basically shows you how hard your money is working for you, so the higher the ROI, the better your investment.
In real estate investing, the return on the interest is expressed as a percentage return over a given time. This could be anything from 6 months to a year. It shows how much profit your investment property will generate in the given time frame. To work this out, you should compare the rent yield against the initial investment capital.
Leverage is an important factor when investing in property which is why return on interest is so important. It allows the landlord to take into consideration the effect of a mortgage on the returns. It does this by splitting up the actual investment whilst also determining the rate of the returns generated.
Operation Expense Ratio (OER)
The operation expense ratio is basically a measurement of what the cost is to operate the property compared to the income generated from the property. The operating expense ratio helps to assess the expenses tied to the property as well as their overall portfolio of properties which they can then compare to other comparable properties in the area. A high operation expense ratio means that the maintenance costs are above average as well as the management fees and other costs tied to the properties.
For this to work to your advantage, it’s essential to understand what to include, and what not to include. So to sum up, you should include council tax, insurance, repairs, maintenance, utilities, management fees, waste removal, and other costs alike. Some landlords will also include other costs including legal fees, landlord insurance, landscaping, and property insurance as the costs help to run the property. You should not include anything to do renovation or mortgages such as loan repayments or improvements.
Occupancy Rates
If you have multiple properties, it’s important to understand whos in your properties and how long they are unoccupied as this can result in cashflow issues. This is exactly what a property’s occupancy rate is, it outlines the amount of time a property is unoccupied over a time frame, usually a year. The occupancy of a property starts from when a tenant moves in until the renter moves out, but an unoccupied property is from when one tenant moves out to when a new tenant moves in. At one time, it wasn’t uncommon for properties to be unoccupied for a couple of weeks whilst the new tenant signs their tenancy agreement, but in recent years, properties are being snatched up.
Occupancy rates help to determine how attractive a property is. It works out that the lower the vacancy rate, the more attractive the property is, as tenants do not want to move out and prospective tenants are wanting to jump on the opportunity to live there.
If you are having issues with tenants, such as them not paying their rent on time or being disruptive, getting landlord legal advice could be very helpful to remedy these issues.
