Key Deal Analytics Metrics

[Ross Hayes]

Hello

First time poster...

We purchased our first investment property a year ago, and we are working to prepare to purchase our second.  I'm trying to educate myself better on the analysis to analyze deal, as well as key metrics to monitor performance of a property once you own it.  We feel like we made a good purchase on the property last year, but with rates higher and prices inflated, I want to make sure our analysis is very tight.

1) What key metrics do you recommend to analyze a potential deal, as well as after a deal is made?

2) For our existing property, how do you calculate return on investment?  How does mortgage payments (interest and/or principal) impact any analysis?

Our interest and focus in long term holds of residential rental properties.  Beyond ensuring that they cash flow, we are most interested in validating that the return on our cash put into a deal is yielding a good return, as well as overall return on the deal.

Thanks in advance!

Ross

[KC Pake]

Quote from @Ross Hayes:

Hello

First time poster...

We purchased our first investment property a year ago, and we are working to prepare to purchase our second.  I'm trying to educate myself better on the analysis to analyze deal, as well as key metrics to monitor performance of a property once you own it.  We feel like we made a good purchase on the property last year, but with rates higher and prices inflated, I want to make sure our analysis is very tight.

1) What key metrics do you recommend to analyze a potential deal, as well as after a deal is made?

2) For our existing property, how do you calculate return on investment?  How does mortgage payments (interest and/or principal) impact any analysis?

Our interest and focus in long term holds of residential rental properties.  Beyond ensuring that they cash flow, we are most interested in validating that the return on our cash put into a deal is yielding a good return, as well as overall return on the deal.

Thanks in advance!

Ross

Hello Ross,

Congratulations on your first investment property and on preparing for your second! Here are some insights to your questions:

Key Metrics for Analyzing Real Estate Deals:

Net Operating Income (NOI): This is your total income from the property minus operating expenses (excluding mortgage payments). It's a crucial metric for understanding the property's profitability.

Cash Flow: This is the net income after all expenses, including mortgage payments. Positive cash flow indicates that the property is generating more income than expenses.

Capitalization Rate (Cap Rate): This is used to estimate the investor's potential return on investment. It's calculated by dividing the NOI by the current market value of the property.

Cash on Cash Return: This measures the return on the actual cash invested. It's calculated by dividing the annual pre-tax cash flow by the total cash invested.

Internal Rate of Return (IRR): A more complex metric, IRR calculates the profitability of potential investments over time, taking into account the time value of money.
Calculating Return on Investment (ROI) and Impact of Mortgage Payments:

ROI Calculation: ROI is typically calculated by dividing the net profit of the investment by the total amount of money invested. For a rental property, your net profit would be your income from the property minus expenses, including mortgage payments.

Mortgage Payments: The principal portion of your mortgage payment is a reduction of liability (your loan balance), while the interest portion is an expense. The principal payment increases your equity in the property but does not affect your cash flow, whereas interest is an expense that reduces your net income and thus impacts your ROI.

For long-term residential rental properties, focusing on cash flow and ROI is a good approach. However, also consider the appreciation potential, local market conditions, and your property's location, as these can significantly impact your investment's long-term success.

Remember, each property and market is unique, so these metrics might need to be adjusted based on your specific situation and investment goals. Consulting with a financial advisor or a real estate investment expert can also provide tailored advice for your situation.

Hope this helps - Best of luck with your investment journey!

KC