It should not be surprising that the majority of market players employ real estate KPIs given that it is one of the largest sectors in the world. Contrary to popular opinion, these measures are employed for more than just monitoring news reports on real estate sales. They also keep track of information relating to property leasing, management, and development. As a result, there are numerous market players with a variety of objectives and viewpoints on the real estate sector.
In this blog post, we will be sharing how to measure the performance of your real estate property.
What is a KPI for real estate?
A Key Performance Indicator (KPI) or metric for the real estate sector is a quantifiable metric used to evaluate the performance of a company in the real estate sector. A Key Performance Indicator (KPI) or statistic for the real estate sector is a measurable indicator that can be used to evaluate the performance of a company, an investment, or a person working in the sector. These performance indicators can be used to evaluate a variety of business sectors, from the success of individual realtors to the potential of investment properties. Making better business decisions or identifying your company’s shortcomings can be done with this knowledge.
How to Measure KPIs for Real Estate?
Cash Flow per Unit
Rent limitations are the main reason why developments for affordable housing are often not intended to produce significant amounts of cash flow. Total net operating income less operating expenses, required replacement reserve contributions, and required debt servicing on so-called “hard debt” is the definition of the standard cash-flow statistic.
The repayment period or payback period is one of the most crucial real estate investment indicators available. This KPI calculates how long it will take for your Dubai real estate property to recoup the initial investment. One of the first quick calculations you should make when vetting possible properties is this one.
Payback Period = Project’s Initial Capital Cost / Annual Savings or Earnings
Return on Investment (ROI)
When investing in anything, it’s important to understand how your money has done. You might also be interested in knowing how the investment would have done in the past. This real estate investing metric accomplishes just that.
ROI is calculated as (Net Profit / Total Total investment) * 100%.
Cash on hand for distribution
How much money will the property annually deliver to its investors? According to Jenny Netzer, CEO of TCAM, “That’s the question owners, investors, regulators, and subordinate lenders want to know in order to budget, to monitor performance, to target changes, and to determine the worth of the property.” Cash available for distribution to subordinate lenders helps in debt repayment and provides capital for additional loans.
“Cash flow” is a term that signifies What is genuinely available for distribution once all necessary debt has been paid off, cash set aside for immediate expenses, reserves financed, and releases of reserves taken into account.
Although it’s not easy, well-run businesses have mastered the art of estimating bottom-line cash and using those projections to motivate employees.
Operating Expense Ratio
How much does it cost you to oversee and maintain all of your Dubai real estate property? Is it time well spent? By contrasting the operational expenses and the rental income, this real estate performance statistic might assist you in making that choice. This ratio should ideally be under 80%.
Operating expense ratio: (Total Operating Expenses – Depreciation) / Gross Revenue) * 100%
Comparing performance to a standard Dubai real estate property is the process of managing performance. While some of the other metrics are valuable for portfolio analysis and underwriting, they’re too general to assess the performance of specific properties, property managers, and sponsors. According to Netzer, a budget that is both reasonable and aspirational serves as the gold standard for managing actual performance.
The best managers create annual operational budgets that are informed by past performance, research, and the property’s unique capital, leasing, and maintenance plans. Then, says Netzer, “important financial statement variations from the budget for revenue, expense, and capital replacements can be leveraged to improve property performance, not only measure it.”
Although occupancy rates for affordable housing are in the high 90s nationwide, is all the rent that ought to be collected truly being collected? asks Netzer, a veteran of the affordable housing sector. “Too many properties are losing money to bad debt and/or concessions.”
The most helpful metric, in this case, is an economic vacancy, which calculates the percentage of rent charged that was earned in rent after concessions and bad debt. Low physical vacancy paired with high economic vacancy suggests that rent levels, leasing procedures, and/or collection procedures need to be examined.
KPIs for Mortgage Lenders
Ratio of Loan to Value (LTV)
When deciding how much of a down payment they need on a mortgage application, lenders frequently evaluate this key performance indicator. You want to put as little money down as you can while securing the greatest interest rate as a real estate investor. The lowest rate is often achievable with an LTV ratio of 80% or below.
LTV Ratio: Mortgage balance / Appraised Property Vareal estate performance statistic lue
Average Mortgage Rate
It’s critical to monitor the average of mortgage rate across all of your properties if you’re a real estate investor. This number can be used to determine whether or not homes should be refinanced by comparing it to the current index mortgage rate.
Average Mortgage Rate = Sum of Mortgage Rates / # of Mortgages
Equity to Value Ratio
This real estate metric, which can be used to measure any type of leveraged investment, is arguably better known by its more general name, the equity ratio
Equity to Value Ratio = Total Property Equity / Total Property Value
The equity ratio is used to assess a company’s level of leverage. It measures the equity you have in a property in relation to its assessed value. A ratio of less than 0.5 typically implies that a company is overly loaded.
Although this is not a comprehensive list of KPIs that a real estate investor should be monitoring, it does cover the most critical ones that you should be checking frequently. Finding the right property that gives the highest rate of return can be a daunting task.
Visit Next Level Real Estate or contact our team for a more comprehensive guide on real estate investments and browse through the best property projects in Dubai.