Rental Valuation Metrics: Understanding the Key Indicators of a Successful Investment

Rental Valuation Metrics: Understanding the Key Indicators of a Successful Investment

Peter Woo, Dan Gilbert, and Wu Yajun are all billionaires belonging to a tiny group of ultrawealthy. Unlike Jeff Bezos and Warren Buffet, though, they all have one thing in common: They began making their fortunes in real estate.

That's right, being a real estate investor may be the first step to finding your fortune. A rental property owner, with careful planning, can build up from a couple of rentals to dozens. Once you have a healthy profile, how do you conduct your rental valuation?

Today, we take a look at the key indicators of a successful rental property investment in the New York area.

Net Cash Flow

Cash flow refers to how much money you have coming in versus how much you have going out. On a regular basis, you must prepare a cash flow statement. This gives you a bird's view of the rent you're earning, minus property taxes, debts, and other expenses.

A profitable rental property is one that brings in more money than you spend on it. If it's costing you more money than it's making, it's time to reevaluate and find ways to boost profitability. For example, by getting an HOA management company to increase property values.

Cap Rate

Cap rate refers to your expected rate of return. To get this number, you divide the market value of a property by its net operating income. The rate changes depending on the market and location, but you should aim for about 5-10%.

Net Operating Income

To get gross operating income, you must first tally up all forms of income that a rental property earns. This includes everything from rent to utility charges, pet fees, and parking fees. Then, you subtract operating expenses from gross operating income to get net operating income.

This provides a helpful comparison for one property from another, even when factoring in other elements.

Vacancy Rates

Vacancy is the worst situation for a landlord of any kind. Properties still have mortgage payments and taxes to pay regardless of whether they are earning rent. Without that rent to offset these costs, vacancy rates could deal a heavy blow to cash flow and ROI.

Operating close to 100% occupancy in New York is vital with high property taxes. Minimizing vacancies to only a month or two at a time prevents expenses from exceeding property value. To streamline things and appeal to more tenants, many a real estate investor turns to an outsourced management company.

Return on Investment (ROI)

ROI is a universal investing term that applies to rental properties as well. It determines how much profit you're making off of a particular investment after factoring in its costs.

So, for a rental property, you are factoring in all of your expenses: upgrades and repairs, closing costs, down payment, and so on. You divide this by your expected annual return and voile, you've got your ROI.

Get Your Rental Valuation at PMI Manhattan Group

Rental valuation determines cash flow and ROI for a rental property owner. It's an analysis of how charging rent stacks up against your expenses. This way, you can determine if you need to make changes to your rental strategy for profitability.

PMI Manhattan Group provides full-service property management with 20 years of experience in the New York area. Schedule a consult with us today.