Investing in real estate can be a really rewarding venture, but only when you make smart purchasing decisions. To make sure that happens, you’ll want to start getting knowledgeable about the specific metrics you’ll want to track to define what a “good deal” looks like.
It doesn’t matter if you’re a seasoned investor or getting ready to make your first real estate investment – numbers are the best tools you have for protecting your capital.
Below, we’ve put together a guide to help you navigate real estate deals with confidence moving forward.
Total Net Profit
To see how a property is really performing, the first thing you’ll want to look at is your Net Operating Income (NOI). To find this number, you take the total income that a property brings in and subtract all the normal costs of running it every day.
This metric gives you a clear picture of a property’s earning potential over time. By ignoring things like your mortgage, depreciation, or personal taxes, you’re able to focus on the asset’s actual value. Tracking these figures helps you to judge an investment on its own merits before you ever sign a lease or put a “for sale” sign up.
Cash Investment Performance
Cash-on-Cash (CoC) return calculations are a great way to see how hard your actual cash is working. You calculate it by dividing your annual cash flow by the total amount of money you personally put into the deal.
When you calculate this figure, you include any upfront spending you commit. This includes down payments, closing costs, or any money you spent renovating the property. CoC is really helpful when you’re comparing two different properties or deciding which loan offer is better.
Rental Revenue Multiple
Gross Rent Multiplier (GRM) is useful when trying to calculate the earning potential of a rental property. To get this figure, divide the sale price by the total yearly rent. This is a quick and easy way to vary if you’re overpricing listings, and it helps you spot overpriced listings before you waste too much time fixing the issue.
White GRM can be helpful, but it shouldn’t be the only metric you track. GRm doesn’t account for maintenance, property management fees, or the specific terms of your mortgage arrangement. It’s a great first filter, but you’ll want to dig deeper before making an official rental property decision.
Debt Payment Safety Margin
Debt Service Coverage Ratio (DSCR) is a calculation that helps you identify if a property is able to pay for itself over time. You find this by taking your net operating income and dividing it by the total amount of mortgage payments you have. This calculation should include both the principal and interest.
If your DSCR is above 1, it means the rental income covers the loan. Lenders love this calculation because it shows them how much breathing room you have before running into negative margin territory. If the number is too tight, you might find it harder to get financing since you might have too much risk in the eyes of the bank.
Debt-to-Equity Ratio
The Loan-to-Value (LTV) ratio compares your mortgage balance to what the property is actually worth today. It shows you how much of the property you actually own versus how much you still owe to the bank. It’s an effective way to see how much borrowing power you have left for your next move.
A high LTV means you’re heavily leveraged, which can be risky if the market dips. Most investors aim for a lower ratio because it gives them more equity and lowers their monthly costs. Having that extra equity also acts as a safety net if things get rocky in the housing market.
Unoccupied Unit Percentage
The vacancy rate is the percentage of time your rental units sit empty. You calculate this percentage by looking at how many units were unoccupied over the course of a year. If you have a single-family home, you’d look at how many months it was empty.
If this number is consistently high, it’s a major red flag. It might mean the rent is too high for the area or there’s something physically wrong with the building. Since a steady income is the goal for these types of property investments, a high vacancy rate is usually a sign that you need to change your rental strategy.
Capital Gains Percentage
The rate of appreciation tracks how much the home’s value goes up over time. While monthly cash flow is great for paying bills, appreciation is where you build real wealth over the long haul.
To guess where this is headed, you have to look at things like local job growth and any home upgrades you plan to make. It’s a long game that requires patience. For most investors, the goal is to buy in an area where values are trending up so you can walk away with a significant profit when it’s finally time to sell.
Make Smarter Investment Choices
Success in the property market comes down to the numbers. If you stay disciplined and track these key metrics, you stop relying too much on “gut feel” during deals and start making smarter investment choices.
By using the indicators discussed, you’ll be able to start building a high-yield portfolio that sets you apart from other investors and helps you to secure your financial future.
