Measuring a Rental Property’s Performance
As a rental property owner, it is essential that you can evaluate a property’s performance over a given period. Failure to accurately assess a property’s performance and adjust accordingly could lead to poor management choices and financial mistakes. Furthermore, not accurately evaluating the potential or drawbacks of a rental property that you are interested in purchasing could lead you to leave a significant investment on the table or buy a property that is doomed to fail. Below are several measures that can be used to measure a property’s performance and give landlords a better understanding of their property portfolio.
Cash Flow Per Unit: The standard way that most property owners measure the performance of their rental property is through the standard cash flow metric. This metric gives an idea of how much profit you are making on each unit. The standard cash flow metric is calculated by the total net operating income, net of operating expenses, required replacement reserve contributions, and mandatory debt.
Rent Yield: Rent yield is another way to calculate rental performance by comparing income from a property versus the cost of the property. To calculate Gross Rent Yield, you divide your annual rental income by the property value and multiply it by 100. For a more accurate but more complicated measurement of your property’s performance, you can calculate the property’s Net Rental Yield. To calculate net rental yield, you need to calculate your annual rental income minus all annual expense then divide it by the cost of the property value and then multiply by 100. If a property has a low rent yield, it could indicate that the amount of capital needed to invest in the property could be better suited investing in another property.
Vacancy as a percentage of Income: Vacancies are a standard aspect of managing a property. Nevertheless, when you have a vacancy you are losing out on income and consequently making less profit. To calculate how overall vacancies affect your bottom line you can calculate vacancy as a percentage of income. If you are looking to buy a potential rental property or managing one with multiple units, you can calculate loss income due to vacancy by dividing the property’s actual income by lost income due to vacancy and then multiplying it by 100 to see the percentage of loss rental income. A percentage above 15% is very high, and you need to consider either passing on purchasing the property or managing your own vacancy’s better.
To accurately calculate the performance of your property to determine your true profit, you need to be able to track related financial variables. Having a property management system with advanced tracking metrics is key to understanding the real and projected cost of running your property which will enable you to calculate the true performance of your rental property. In addition, by utilizing Building Management Software or Commercial Management Software, you can find problem areas where you could decrease cost and potentially increase your overall profit.
This post is provided by RISSOFT Residential and Commercial Property Management Software, specializing in innovative and cutting-edge management software for all 50 states. Request a demo or contact us today to receive more information.
Disclaimer: The information provided in this post in not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.
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