Cash flow metrics guide smart property investment decisions. They reveal a property’s profitability, risks, and overall financial health. Tracking the right ones ensures you’re making informed choices that align with your goals.
So, let’s explore five cash flow metrics that every property investor should track.
Net Operating Income (NOI)
Net Operating Income (NOI) measures the profitability of a property before financing costs. To calculate it, subtract operating expenses like maintenance, taxes, and insurance from your gross rental income.
This metric is essential for understanding how efficiently a property generates income.
Investors rely on NOI to compare potential real estate investments without considering financing differences.
By focusing on operational performance alone, you can evaluate whether a property’s income justifies its expenses. A solid NOI signals strong potential for cash flow growth over time.
Debt Service Coverage Ratio (DSCR)
This metric measures how well a property’s income covers its debt obligations. It’s calculated by dividing the NOI by the total debt service, such as loan payments.
For investors, a DSCR loan uses the Debt Service Coverage Ratio (DSCR) to help evaluate whether a property can support its financing costs without dipping into personal funds or reserves. A higher ratio means better coverage and less risk.
Some lenders, such as Griffin, even offer DSCR loans, which base eligibility on rental income instead of personal earnings. These are ideal if conventional loan qualification proves difficult due to inconsistent income or other barriers.
Cash-on-Cash Return
Cash-on-cash return measures the annual cash income you receive compared to the amount of cash you invested. To calculate it, divide the annual pre-tax cash flow by the total cash invested.
This metric provides a clear picture of your investment’s immediate profitability, focusing only on actual out-of-pocket expenses.
It’s especially valuable for comparing opportunities where initial investments vary significantly.
Tracking this ensures you’re earning sufficient returns for your risk and effort, helping identify whether an investment aligns with your financial goals effectively.
Gross Rent Multiplier (GRM)
Gross Rent Multiplier (GRM) estimates a property’s value compared to its rental income. To find it, divide the property’s price by its annual gross rental income.
This metric is a quick screening tool for assessing whether a property might be worth deeper analysis. Lower GRMs typically indicate better cash flow potential, while higher ones may signal overpriced properties.
By tracking GRM, you can efficiently filter out less promising investments and focus on opportunities that better align with your profit targets.
Capitalization Rate
Capitalization rate, or cap rate, evaluates a property’s profitability relative to its market value. Calculate it by dividing the NOI by the property’s purchase price or current market value.
This metric helps you compare potential returns across different properties without considering financing details.
Higher cap rates often signal higher risk but better cash flow potential, while lower rates indicate more stable investments with modest returns.
Monitoring cap rates keeps your investment strategy balanced between profit potential and risk tolerance.
Wrapping Up
Tracking these cash flow metrics equips investors with critical insights to make profitable property decisions. They simplify complex financial evaluations, highlight risks, and guide strategy.
By focusing on these numbers, you’ll build confidence in achieving long-term real estate success!
