6 Most Important Metrics for Real Estate Investors
Every commercial property has a set of important metrics, which define the alluringness of this or that real estate object. Commercial real estate metrics include yield on cost real estate (or OER), real estate return on investment, and others. We are looking at them in this article.
What is OER in investing and how it is calculated
One of the most important stock metrics is OER (alternatively known as NOI – Net Operating Income), which defines the income that any commercial real estate investor will have on hands as a result of running a property after deduction all operating expenses that are normally borne on a yearly basis to run the object.
The OER is defined in percentage and its formula is as such:
Total yearly operating expenses (TYOE) minus yearly depreciation (YD) divided by gross revenue (GR) multiplied by a hundred percent. It is comprehensible like this:
All numbers should be given in their yearly values.
Let’s look at this in the following example.
You are running a commercial multi-family rented place. You have 20 apartments generating you $30,000 a month. Your yearly depreciation of the object is 15% of its cost, let’s assume, $55,000. Your monthly expenses to run the object are $20,000. Thus, the formula will be:
Ideally, the lower your OER is the better. In real life, anything between 60% and 80% is considered good enough as a long-term investment.
What is included in the OER? All normal operating expenses, which are connected to running the object:
- utilities (water, electricity, pest and rat control, trash removal, pool and landscape management)
- repairs and damage
- management and employee fees
- property taxes
- attorney fees
- marketing (advertising)
What is not included in OER:
- capital improvements and large renovations or re-building, including the possible construction of new square footage to enlarge your object
- something one-time, which isn’t necessary or recurring, for instance, inviting a painter to decorate walls with paintings.
ROI. Connection of real estate ROI and OER
A good question: why do I exclude depreciation of a commercial object from my real estate metrics OER? Well, because yearly depreciation is not an operating expense – it is the depreciation of capital investment. Also, there is a chance that there is no depreciation at all connected to one of your particular premises – if you sell it after the years of usage with a surplus compared to the price of purchase. It is absolutely possible. However, it is about how much you will gain on your asset when selling it, which is ROI, whilst OER shows you how much you gain yearly on running it, utilizing a particular object as your business asset, which generates the added value. For similar reasons, if you take a loan to pay for your real estate object, the expenses you bear connected to the loan also are not included in OER – they’re included in ROI.
ROI is Return On Investment, which basically defines when your investments in some real estate object will recoup. Let’s say, you spend $2 million to buy one. As derives from the numbers above, you earn $360,000 annually, while spending $240,000 annually on various monthly running. Depreciation consumes another $55,000. What you left is $65,000 annually ($360,000-$240,000-$55,000). ROI will be 30.76 years: $65,000/$2,000,000.
However, this does not show the real profitability of your investment upon selling it, as you could sell it for a bigger price than you’ve bought it. ROI is specifically about how much time is needed so you fully recoup your investment in an asset by managing this asset and gaining profit from it. If you sell it at some point in the future and get, let’s presume, 2.5 million for it, you can calculate the Return On Asset (ROA) indicator, which we describe below. Attention: don’t forget to include loan-connected expenses in your ROI!
What are the other real estate investment metrics?
ROA: Return On Asset. It defines how profitable, in the end, some particular asset is for you. In the given example, if you buy a real estate object for $2 million, sell it in 5 years for $2.5 million, and earn $65,000 annually during these 5 years, then your ROA is such:
ROA=$2.5 million+$65.000*5 $2 million*100%=141.25%
Alternatively, if you swap real estate objects by simply buying and selling, then exclude from this formula the net yearly income. If you buy, improve, and sell, then instead of net yearly income, you should include the losses connected to the improvement/renovation, which will decrease the percentage, not increase it.
Cash flow rent metrics. It is a monthly metric, which says how much money you have left on your hands (if any) after you obtain all your revenues and extract from them all your operating expenses. That typically would not include yearly depreciation and shows how much you actually physically hold on hands monthly. In the example above, your monthly cash flow will be $30,000-$20,000 = $10,000.
Cash on cash return. This is a continuation of Cash Flow only given your loan-connected expenses, which you have in case if you will have bought a property for the loaned money. In the example above, presuming you will have borrowed 1 million of the 2 million in total with a 4% interest rate, which roughly makes a $3,333 monthly loan cost, your cash on cash return is $10,000-$3,333 = $6,667.
Gross Rent Multiplier. This is an indicator, which allows roughly estimating the building market value given all its monthly rent values. It will strongly depend on the current market and comparable properties’ prices. There exist several formulas to calculate it, which you can find online.
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Investment advice and recommendations
DGY is an investment company that takes care of every client and helps them become successful investors. With the help of an investment experience and a well-thought plan, we will help you examine the market, choose a strategy specifically for you or your business, and calculate future costs to start making money with real estate investment.
In order to invest in real estate, you should consider how you will run your management in Ukraine. DGY will help you eliminate all possible pitfalls at an early stage as a personal project manager will be assigned to your case. They will assist you in choosing the project according to all required objectives.
DGY Investments takes care not only of purchasing property but also renovating an existing one. With the help of a thorough plan and estimating, we will thoroughly prepare a property for sale. Our professionals evaluate an investment property and create a strategy that includes the costs for renovation, possible taxes, fluctuations on the market, etc. Therefore, our clients are able to resell the renovated properties in Ukraine with more than 15-20% profit from the initial price.
Before our clients decide to deal with real estate investing, they consult with our experts concerning details such as the necessary documents needed to purchase a property and successfully run all the processes connected to it.
Therefore, if you are eager to invest in Ukraine, it’s essential to have all the paperwork done correctly, and that’s the moment when our team of experts takes care of this step. DGY Investments helps investors buy real estate property, manage the paperwork, start preparing relevant documents for purchasing realty in Ukraine, and close the deal successfully.
Real estate investment opportunities in Ukraine
When an investor decides to invest in real estate in Ukraine, the most affordable way to attain stable passive income is through buying residential real estate. Investors can expect to receive a regular monthly payment from their tenants at a fixed monthly amount, unaffected by inflation or other unforeseen circumstances. The amount of rental income will vary depending on the size, type of property and location. For example, buying an apartment in Ukraine’s capital Kyiv is beneficial to investors due to offering a large working population, central location and affordable prices. Hence, the minimum price of renting a decent one-bedroom apartment in Shevchenkivskyi District will be around $1000 per month in 2021, followed by Pecherskyi District with a cost of $850 per month. Besides, investing in real estate in Ukraine annually brings clever investors up to 15% of yield, attracting many business people every year.
Properties for investments in Ukraine
Ukraine has a giant sector for real estate investing. Businessmen who come there all over the world often choose between investing in residential and commercial properties. The main advantage of buying property in Ukraine is the affordability of prices on the houses and apartments. For instance, if you invest in real estate in a historical district, a luxurious apartment will cost you around $80k only.
How to invest in Ukrainian Real Estate
In order to invest in Ukrainian real estate, you should take into account a list of crucial factors. The first one is to choose what kind of realty you are going to invest in: residential or commercial. It is vital as it should comply with Ukrainian real estate law. The second tip is to identify the purpose of purchase in order to make a strategy for the property. For instance, you may purchase the property for your own use or buy it for lease. The next step is to calculate the taxes and what kinds of taxes are payable during the purchase, owning, or selling. Also, to invest in real estate properly, you should keep in mind currency control rules in Ukraine to sell a property and get a higher profit.