How to Benchmark Your Rental Properties: KPIs Every Landlord Should Use

Key Takeaways

• KPIs (key performance indicators) are important metrics for real estate investors to keep track of.
• Without being properly educated on your property’s performance, you can end up losing money, or even needing to dispose of your asset.
• Partnering with a property management team can maximize your income and smoothly keep track of finances.

Key Performance Indicators, or KPIs, are the most important numbers that landlords must track for the sustained success of their investment properties. KPIs help landlords conduct a forensic analysis of their rental operations to gain a fuller understanding of the asset’s performance.

These numbers ensure that landlords are not pouring money, energy, and time into solving the wrong problems. But by allowing systematic assessment of the financial health of a property, they ensure that landlords not only understand the issues but are also making the right decisions. Continue reading this guide by Action Properties Inc. to learn more.

Why Do KPIs Matter?

• They offer real-time financial insights on your investment
• They let you spot potential issues before they become actual problems
• KPIs let you compare realized success against projected success
• KPIs provide the data to help you make informed decisions
• Instead of reactively solving problems, KPIs give you control

What are the most important Key Performance Indicators (KPIs) you should monitor as a landlord?

Net Cash Flow

This is the total income from the property (rent and other sources of income) minus the expenses on the property, including mortgage payments, taxes, and the rental’s operating cost. Basically, it is how much money you have left after you have paid your bills. Net cash flow measures a rental’s profitability.

To calculate net cash flow, use this formula:

Net Cash Flow = Gross Rental Income – Total Operating Expenses

Net Operating Income (NOI)

This measures a property’s profitability before accounting for financing costs and income taxes. NOI is a critical metric for lenders; they often base their decision to approve or disapprove a loan application on it. NOI also helps investors determine the income-generating potential of an investment property. By looking at the NOI, it is possible to accurately forecast a rental’s future cash flow.

To calculate Net Operating Income (NOI), use this formula:

Net Operating Income = Gross Rental Income - Total Operating Expenses

Cap Rate (Capitalization Rate)

The Cap rate measures the potential return on the rental property relative to the cost of the investment. This is done by dividing the property’s Net Operating Income (NOI) by its current value or purchase price. The resulting figure is expressed as a percentage. Cap rate allows investors to compare the potential returns on different properties.

To calculate the Capitalization Rate, use this formula:

Cap Rate = Net Operating Income ÷ Property Value

Return on Investment (ROI)

ROI is one of the most important metrics for real estate investors. When evaluating the potential profits from a prospective property investment , you may use the ROI to determine if it is a good deal or not. ROI is the total cash invested in the rental divided by the annual net profit. To be considered viable, the ROI on a rental property should be between 6% and 12%.

To calculate the Return on Investment, use this formula:

ROI = (Total Earnings – Total Expenditures) / Total Investment

Operating Expense Ratio (OER)

This metric measures the cost efficiency of the property. A lower OER equals better management and higher profitability. To calculate OER, divide the annual operating expenses by the effective gross income. Total operating expenses is the sum of all recurring costs like utilities, repairs, maintenance, insurance , property management fees, property taxes, etc. The total effective gross income is the total potential rental income less vacancy costs and credit losses.

To calculate the Return on Investment, this is the formula:

OER = Operating Expenses / Gross Operating Income

Loan-to-Value (LTV) Ratio

Lenders use the Loan-to-value ratio to evaluate the relative riskiness of a loan. LTV compares the total loan amount to the appraised value of the property. Investment properties with a lower LTV pose a greater risk to lenders because it means the lender has more equity in the property. The risk that the borrower will default on such a mortgage is higher. For investors, a higher LTV ratio of 70%-80% puts them at an advantage when financing or refinancing a rental property.

To calculate the Loan-to-value (LTV) ratio, use this formula:

LTV Ratio = Loan Amount / Property Value

Vacancy Rate

The vacancy rate is a self-explanatory metric that looks at whether occupancy is being maximized in a rental property. The vacancy rate is a major factor in the income-generating potential of the rental. Vacancy rates provide insights into the rental demand in a location or for specific property types. Vacancy rates also offer insight into the desirability of the property in terms of the amenities and its overall condition. Investors can use this metric to assess if the rent is too high or if a market has lost its attractiveness.

To calculate vacancy rates for a rental property with multiple dwelling units, use this formula:

Vacancy Rate = (Vacant Units / Total Units) x 100

For a single property, the alternative formula is:

Vacancy rate = (Number of days vacant / Total days in the period) x 100

Tenant Turnover Rate

Tenant turnover rate measures tenant satisfaction by looking at the percentage of tenants who move out of the rental property over a period of time. If a rental property has a high tenant turnover rate, it will also have high vacancy costs - advertising, cleaning, repairs, etc. Landlords can use this metric to assess the impact of repairs & maintenance, communication with tenants , and overall management of the property on their ability to get tenants to renew their lease.

To calculate the tenant turnover rate, use this formula:

Tenant Turnover Rate = (Number of Move-outs / Total Number of Units) x 100.

Bottom Line

These 8 KPIs are some of the most important for landlords, but these are by no means the only ones property investors can use to assess their investments. Which of these KPIs do you use? Which ones do you think are most relevant to the performance of your rental property?

Looking for more assistance with your investment? Consider partnering with Action Properties Inc. We can assist with every aspect of property management.