Top 7 Metrics Every Investor Should Know
Worthwhile math that stands for a thought-out investment
- learn the importance of calculation consistency
- semantics of KPI talks
- 7 star metrics in a nutshell
For everyone interested in property investment, it is crucial to tackle certain metrics, understand them and use them wisely. Some might say that it would be much more comfortable to make some real estate experts do the math. Indeed, it would. But isn’t it tempting to save the money someone else would snatch and… well, actually invest it?
The fact is that different investors calculate some of these metrics in slightly different ways. For example, some include taxes in Net Operating Income (NOI) and those, that don’t. Some calculate Cap Rate (CAP) using the total purchase price, while others use the current market value of the property. Ultimately, it is not important which items are included in the calculation formula, but calculating consistently the same way when comparing investments, without exception. It is the only way to ensure that the result of the comparison is truly useful.
Furthermore, when you talk to fellow investors about investment performance, sooner or later you end up clarifying which KPIs (key performance indicators) you use and how you calculate them. Otherwise, each investor is probably talking about differently considered metrics and your property comparison is invalid. One example for all: Everyone is interested in Return on Investment (ROI) and everyone wants the ROI of their property to be “awesome”, “amazing”, or at least “great”. What is an “amazing ROI”? 3%? 33%? The higher the better? The lower the better? If the number meets your expectations and fits in your plans (raise the value and sell asap, keep it for regular cash flow…), any number can be “amazing” for you. Also, ROI has a different meaning for different investors in a way that some are actually talking about cap rate or cash flow.
Don’t let it derail you. There is always a common ground you can build your understanding on. The ground lies in internalizing a few calculations so that you are always ready to elucidate what you mean by “poor monthly income” (ROI? NOI?) and what you take into consideration when calculating it.
We know that arithmetic may be intimidating for many people. To be honest, I am most certainly one of them. Believe me, if I can manage to see through them, sure you can too. There are plenty of metrics you will have an opportunity to get familiar with once you decide to invest in properties. Nevertheless, we enlisted SEVEN that successful investors consider most important to understand. Not only because seven is our favorite number, but also because you don’t need an MIT degree to calculate them.
A star metric #1 is Net Return on Investment (Net ROI). Why? Because ROI tells you how much profit you can expect to make in rental income over the long term.
A star metric #2 is Net Operating Income (NOI). Why? Because NOI tells you if a specific investment will generate enough income to make mortgage payments.
A star metric #3 is Cap Rate (CAP). Why? Because CAP tells you how well a property produces income after subtracting expenses.
A star metric #4 is Cash Flow (CF). Why? Because CF tells you how much money will remain on your bill after you harvest all income from the property and pay the property’s expenses.
A star metric #5 is Cash on Cash Return (CoC). Why? Because CoC tells you how much of your down payment comes back to you in cash per year.
A star metric #6 is Return on Capital Employed (ROCE). Why? Because ROCE tells you the annual return on rented property paid through a mortgage considering the total initial cost.
A star metric #Last but not least is Flip Return on Investment (Flip ROI). Why? Because Flip ROI tells you if a property would be a good candidate for purchase, renovation, and subsequent sale for a topped-up price.