Home > Uncategorized > Using Benchmark Indicators to Compare Real Estate Investments

Using Benchmark Indicators to Compare Real Estate Investments

September 25, 2010 Leave a comment Go to comments

Real estate benchmarking is designed to take the guesswork out of real estate investing. It gives the investors mathematical equations that allow them to judge property based on how much it’s worth right now and what kind of profits it was able to generate in the past. The results of those calculations are known as benchmark indicators.

In order to decide whether to invest in a piece of property, an investor will compare benchmark indicators to his or her benchmarks. Benchmarks represent how profitable the real estate property has to be in order to warrant investment. An investor will need to figure out benchmarks ahead of time.

There are many different benchmark indicators an investor can use when purchasing an investment property.  To not become overly verbose or not to lose you in the minutiae, we have provided shortened versions below.  These are the most common benchmark indicators used for the purchase of investment real estate:

  • Gross rent multiplier–This is a ratio between the sales price and the income the current landlord earns every year. It is used to determine how quickly the investor will be able to earn back the money spent to purchase the property. The lower this number is, the quicker the investor will turn a profit.

  • Cash on cash return–This indicator represents the ratio between the annual income that the investor will earn, prior to taxation, and the down payment that is made on the property. The resulting number is expressed as a percentage. The larger the percentage is, the greater the return will be.

  • Internal rate of return–This benchmark indicator measures the financial efficiency and desirability of the investment property. The higher the number is, the more money the investor will be able to get back for every dollar he or she spent on the property (includes both the initial purchase price and maintenance costs).

  • Debt-coverage ratio–This benchmark indicator is used to determine whether the income the investor earns from the property will be enough to make mortgage payments on the property. The higher this number is, the less likely the investor is to fall behind on mortgage payments.

  • Break-even ratio–This benchmark indicator estimates how vulnerable the investor is to defaulting on the property if the rental income decreases. The lower the ratio is, the less vulnerable the investor is.

  • Loan-to-value ratio–This benchmark indicator measures the ratio between the mortgage loan balance and the property’s current market value and expresses it as a percentage. The lower the number is, the better.

  • Net cash flow–This benchmark indicator measures how much income the investor will have left after regular maintenance expenses. The higher the number the better.

For detailed examples of each or a run through of potential investment properties, send an email or give me a call.

Categories: Uncategorized
  1. October 8, 2010 at 1:44 am

    Lotta good points made here. Thanks for the informative article on Investment Real Estate!

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