If you’re a property owner evaluating a new real estate deal, understanding a few key financial metrics can make all the difference especially when it comes to securing financing and making smart investment decisions. This is another installment of our smart metrics series which we started last summer. Here are some smart metrics that property owners must consider for their next real estate deal:
Gap to Market Rents
Many deals promote a “gap to market” where current lease rents are below market averages. But not all gaps are created equally. Ask: Are the projected rents realistic? How soon can units turn over? Are comps accurate? Don’t overpay based on inflated assumptions.
NOI ≠ Cash Flow
Net Operating Income (NOI) reflects income after operating expenses but excludes financing and taxes. Watch for one-time boosts that inflate NOI. True cash flow also considers capital expenditures, insurance, and unrecoverable expenses.
Cap Rate
This quick valuation tool is NOI ÷ Purchase Price. Aim for a cap rate higher than your cost of capital. Be cautious of deals showing low “going-in” cap rates and relying on compressed “exit” cap rates that can signal risk, not value.
Equity Metrics
IRR measures total return over time, factoring in when cash is received. Break it down: how much comes from cash flow vs. future sale? Make realistic hold-period assumptions.
Financing Metrics
Lenders look at more than numbers. They assess your track record and project viability. Key metrics:
- LTV (Loan-to-Value): Higher = more leverage, more risk
- DSCR (Debt Service Coverage Ratio): Aim for 1.2x+
Finalyze Tip
Be prepared with clean financials, strong projections, an analysis of key real estate metrics and a clear plan to deliver returns. If you want expert support navigating your next project or presenting to lenders, we’re here to help. Schedule a complimentary consultation with us today and let’s help you crush those goals!