Here are the metrics every real estate investor uses to analyze deals!
You’ve been told you need to analyze your real estate deals but you’re not sure where to start?
Here’s your guide to the top investor metrics for analyzing deals!
Once you get these metrics down, you’ll have what you need to confidently analyze properties and decide which is the best investment based on your goals.
Cap Rate = Capitalization Rate
What is Cap Rate?
It measures annual rate of return based on expected profit.
It is the ratio of NOI (net operating income) divided by the home’s purchase price.
A 6.8 cap rate means you’d make 6.8% return on your money = ROI
You want a cap rate higher than your mortgage interest rate
Here’s great video about CAP rate
What does Cap Rate meausre?
It measures annual rate of return based on expected profit. It is the ratio of NOI (net operating income) and the home’s purchase price.
Cap Rate: Net Operating Income / Purchase Price
Low Cap: A lower yielding property has a lower return on investment
High Cap: Higher cap rate offers a higher return on your investment
What’s a good Cap Rate:
Generally you’ll want to look for cap rates between 7 - 15% and can depend on your investment goal.
GRM = Gross Rent Multiplier
What is GRM?
It compares the gross annual rent income to the purchase price of a property.
Essentially it shows how fast the property will pay for itself with given annual rents.
GRM: Purchase Price / Gross Annual Rent Income
Low: A lower GRM indicates annual gross rents will pay off the property more quickly
High: A higher GRM indicates annual gross rents will take longer to pay off the property
When To Use GRM:
Get first-glance analysis of whether a property is worth pursuing. Quick, easy, info is readily available
1% Rule
What is the 1% Rule?
It is the assumption that a property should bring in 1% of its purchase price in rent each month.
1% Rule: Monthly Rent / Purchase Price
High: 1% or higher is good and means your monthly rents are really good compared to the price you paid.
Low: Below 1% isn’t bad, it just indicates markets that have higher purchase price vs. monthly rents.
What’s a good rate:
It can be harder to find properties that generate 1%+ in monthly rents. Anything at or above 1% is great!
Cash-on-Cash Return
What is Cash on Cash Return?
It shows how quickly the cash invested in a property will be returned.
CoC: Net cash flow / Cash invested (down payment, closing costs, renovations, furnishings, decor)
High: The higher the return, the quicker the cash will be repaid and ready to use in another investment
Low: The lower the return, the longer it takes to “pay yourself back” your initial investment
What’s a good rate:
Like other metrics, it depends. Generally 8%+ is considered a good CoC for LTR, 12%+ is good for STR
Are there more metrics than these?
FOR SURE!
There are a few other metrics investors use - like IRR or internal rate of return - that are more complex and comprehensive, so we’ll cover that one in a separate post.
For now, these 4 metrics are a great place to start analyzing deals, getting comfortable with numbers and spreadsheets, and seeing what kinds of returns you can get in the markets you’re considering.
We’re always here as a resource if you have questions or want help analyzing a deal!