Acquiring properties, screening tenants, and collecting rent are all tasks that you are responsible for as a landlord. But, once you do those things, how do you know whether your hard work has paid off? The success of your business relies on how much money you’re making from your investments. There are many ways to track this, but below are five of the best financial metrics that will tell you how successful your rental business is. These 5 Financial Metrics include Rental Income, Net Operating Income, Return on Investment, Internal Rate of Return, and Occupancy Rate.
Contents
1. Rental Income
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Rental income is the total amount that you receive from your tenants over the course of a month or a year. Although this metric may seem like an obvious one to track, it’s crucial that you don’t overlook its importance. Rental income will tell you the overall financial health of your rental business. Tracking your rental income also helps you calculate the rental income earned as a percentage of the property’s value, also known as your gross rental yield. Your gross rental yield can tell you how your property is performing when compared against similar properties in your market.
Factors that affect your rental income could be the location and current condition of the property, the overall demand in your area, and what other landlords are charging for the properties near you. If any of these factors shift, you can see how or if that affects your business by tracking your rental income.
2. Net Operating Income
Your NOI, or Net Operating Income, is a calculation that you or a professional can use to analyze how successful your income-generating real estate investments are.
To calculate NOI, take the total amount of revenue from each of your properties and subtract all necessary operating expenses. Operating expenses are the regular, monthly expenses related to your properties like general maintenance, repairs, or property taxes. Be sure that you do not subtract mortgage payments, since those should not be considered operating expenses. You also shouldn’t count income taxes, interest, or capital expenditures (larger improvements to your properties) in the operating expenses category either.
Once you figure out your NOI, you can determine the profitability of your investments. Lenders and investors will typically use this metric to figure out whether you have enough cash flow to keep up with loan payments.
However, be careful when calculating net operating income. Since you’re using theoretical/projected rent prices, your calculation could prove incorrect. There are many things that could come up that you aren’t expecting, especially if your property is managed incorrectly, so if your income is inconsistent, your NOI will be incorrect.
3. Return on Investment
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You have probably heard of ROI before. Your return on investment (ROI) will tell you how much income your investment produces versus how much money you spend maintaining it. You can find this metric by dividing your annual returns by the cost of the investment.
Calculating your ROI will tell you and any potential investors how well your property is performing. If your ROI is not where you want it to be, it can be a sign that you need to improve certain aspects of your business.
4. Internal Rate of Return
Your internal rate of return, or IRR, estimates the interest you’ll earn on each invested dollar over the holding period of your property. This predicts long-term yield since it goes beyond your net operating income and purchase price.
To calculate IRR, put the net present value (NPV) of the property at zero and then use the projected cash flow of each year you intend on owning the building. NPV tells you the value of your money now rather than what it would be after it accrues compound interest over time. Use software like Excel to calculate this equation since it’s somewhat complicated.
As with most equations, IRR has its limitations. It assumes stability in your rental environment, which is not always the case. You also should only be comparing properties that are similar to yours in terms of size, holding period, size, and other factors.
5. Occupancy Rate
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You can calculate your occupancy rate by dividing the number of occupied units by the total number of units, then multiplying that result by 100 to get a percentage. This is a vital metric that all landlords should track, since it’ll tell you how attractive your property is in the current rental market.
If you have a high occupancy rate, your property is in demand, but if it’s low, you should consider making some renovations or changes to your pricing since that means your property isn’t as attractive to potential renters. Vacancies can be costly to your rental business, and the negative consequences that come from having vacant units will compound over time.
Track your occupancy rate closely to make informed decisions on when and how you should make changes to pricing or marketing strategies over time.
Conclusion
While other financial metrics would be helpful to track as well, the five listed above are some of the more important data points to consider when making informed decisions about your rental business. Whether you’re just starting or are a seasoned landlord looking for more insight into your business, closely tracking these financial metrics will help you understand how to better your business. Learn more by visiting here.
