For passive real estate investors, your job is to steer the ship. You’re the one setting goals, driving acquisition rates, communicating a vision, and, ultimately, evaluating your portfolio performance and pivoting accordingly.
To say that passive investors can just sit on their hands is a lie. You may not be in the trenches with your property management team, but you ultimately call the shots.
And if you want to do so successfully, you’ve got to know how to assess property performance. Here are the top key performance indicators (KPIs) you should consider.
Keep Your Eye on These KPIs
Capitalization Rate
Your cap rate is a percentage that tells you your expected rate of return on an investment. It’s an easy calculation:
Net Operating Income (rental income + any additional investment income) / Market Value (purchase price) x 100
Typically speaking, investors aim for at least a 5% cap rate. Just keep in mind that your cap rate can vary and fluctuate depending on your individual market. A higher cap rate can correlate to higher risk. A lower cap rate isn’t a bad sign if it indicates a stable investment.
Cash Flow
You know cash flow. Your net cash flow is very simply your income at the end of the month, minus expenses paid. It’s the simplest calculation on the list but no less important. Tracking your cash flow can help your see where you might be spending too much, not charging enough, or experiencing frequent issues and vacancies. See what you’re making on each property each month, then get to the root cause behind low or negative cash flow.
Loan-to-Value Ratio (LTV)
Your LTV is a measurement of your leverage in an investment. It’s an indicator of the equity you hold in a property and, thus, the value of your portfolio. Most lenders expect at least a 20% down payment to secure a mortgage. That would mean the LTV is 80%. You lower your LTV by paying down the mortgage (using rental income) and benefiting from property appreciation over time. The lower the LTV, the greater equity you hold.
Vacancy Rates
Your vacancy rates are easy to calculate. Simply divide the number of days your rental is vacant by 365. The standard vacancy rate is between 5 and 10%, and the lower the better. For instance, a vacancy rate of 10% means that you miss out on 37 days of occupancy: over a month’s worth of rental income.
Return on Investment
Your ROI is a metric that transcends real estate and applies to virtually every investment you can make. It measures how much you profit on an investment as a percentage of its cost. Take the total amount of capital you’ve invested upfront (downpayment, renovation costs etc.). Then calculate your monthly income (rental income minus monthly expenses). From there, take the annual estimate for your returns and divide it by the initial investment.
ROI can vary significantly based on your acquisition strategy (buying all-cash or utilizing a lender).
While there are far from a real estate investor’s only valuable metrics, you’ll certainly want to include these in any portfolio analysis.
Now That You Know Them, Here's What To Do With Them
1. Review your investment goals
Your KPIs don’t mean much unless you have a standard to compare them with. Be mindful that your “baseline” expectations and needs for various metrics may evolve over time. That’s okay. Just be sure to regularly assess your established, specific goals, particularly where numbers are concerned.
2. Choose your key metrics
Not every metric you can measure is going to be valuable all the time. While you want to be thorough, recognize that certain KPIs might not be relevant to your long-term investment goals, or may be better suited for different types of investments. Choose the metrics you want to track and focus on them.
3. Stay consistent with calculations
Whatever you choose to track, number crunch with consistency. Calculate using the same variables in each of your investment properties. Use the same time frames. Compare the same metrics. Consistency will give you the clearest picture.
4. Compare performance to your baseline
Line up your calculations with your baseline expectations. How do they compare? Are there patterns that have emerged over time? Where are you willing to accept underperformance, and where do you draw the line?
5. Consult your portfolio advisor
Finally, get together with your portfolio advisor. Go over your numbers to ensure your interpretation is a wise one. Your portfolio advisor can help you devise solutions, plan to adjust, and get your portfolio where you need it to be – whether that’s dropping dead weight or replicating success.
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