When shopping around to purchase an investment property, investors must do their homework to ensure they have a good deal. The deal analysis is not an optional step in the process, it's actually the most important. ‘Never fall in love with the property and only the numbers’ may sound cliche, but investors that don’t obey this Real estate law are going to reap the consequences. Now it’s easy to tell someone to analyze the deal or run the numbers, but what does that really mean?
In this blog, we are going to discuss the 5 most important metrics when analyzing a Multifamily deal.
1. Cash Flow Cash flow is the movement of money in and out of a business. Cash flow is not equal to the profit. Cash flow is a good indicator of how money is being managed. In the case of a multi-unit home, it can indicate whether the rent collected is covering the overall expenses of the building.
The Cash Flow Formula: Cash Flow = Gross Revenue - Expenses + Debt Service + Reserves
2. Cash-on-Cash Return Simply put, the cash-on-cash return is a measurement of the annual return the investor has made relative to the amount paid on the property mortgage during the year. By including the debt this ratio will provide an accurate rate of return for an investor on the property.
The Cash-on-Cash Return Formula: Cash-on-Cash Return = Annual Cash Flow / Total Cash Invested
3. Price Per Door The price per door is huge in multi-family real estate. It is a basic calculation that breaks down the cost per unit of the property. This metric tells you a ton about the overall cost of the property. We recommend that as an investor you have a price per door expectation when shopping for real estate. This will help you quickly eliminate properties and markets that may be outside of your price range without doing extensive analysis. If you're a new investor and you’re not starting out with much capital, it makes a ton of sense to start out in a market with a lower price per door to get the most bang for your buck.
The Price per Door Formula: Price per Door = Purchase Price of Property / Number of Units
4. Gross Operating Income The Gross Operating Income is the actual income an investor can expect to receive from a property after taking into account vacancy rate. The GOI serves as a performance indicator. Investors often look for a GOI sufficient in covering costs so that they do not need to pay operating demands with additional outside cash.
The Gross Operating Income Formula:
+ Other Income (Laundry, storage units, etc)
= Total Revenue
- Vacancy Rate
= Gross Operating Income
5. Net Operating Income Investors wan income-generating properties and the NOI is the measurement of just that. There is no “good” or “bad” NOI. The Net Operating Income is typically calculated annually and will indicate if expenses are too high, or if rent amounts need adjusted.
The Net Operating Income (NOI) Formula: Net Operating Income (NOI) = Gross Operating Income (GOI) - Operating Expenses
There are many different formulas to help in your investment property search. It’s important to look at all aspects in order to obtain a comprehensive property assessment before settling on the purchase. These formulas should be reviewed regularly in order to maintain growth in your investment.