If you’re a rental property investor in the Cypress, TX, area, it’s important to track key metrics to measure your success. By monitoring these metrics, you can make informed decisions about your investments and ensure that you’re on the right path to profitability.
After all, the goal of any business is to make money, and whether you’re an intentional investor or an accidental landlord, your rental properties are no different. Rental property ownership, when done right, is a great way to build long-term wealth.
So, what metrics should you be tracking to monitor and improve your investment property portfolio? Here are some of the most important financial terms for rental property owners in the Houston area.
Rental Yield
This is a measure of how much rental income you’re earning relative to the value of your property. A high rental yield is indicative of a good investment, while a low rental yield may mean that you’re not earning enough rental income to cover your costs.
To calculate your gross rental yield, simply divide your annual rental income by the value of your property and multiply by 100. For example, if your property is worth $100,000 and you’re earning $12,000 in rent each year, your rental yield would be 12% (12,000/100,000 X 100 = 12%).
To calculate the net rental yield, you must subtract your expenses from your rental income. So, if you’re earning $12,000 in rent each year and your costs are $6,000, your net rental yield would be:
($12,000 – $6,000) / $100,000 X 100 = 6%
i.e. (annual rent – costs) / property value X 100
The net rental yield is a good indicator of how your income after expenses compares to the maximum revenue you could be earning from your rental property.
Occupancy Rate
This measures the percentage of rental units currently occupied by tenants. A high occupancy rate means that your rental property is in high demand, while a low occupancy rate may indicate that you need to lower your rents or make other changes to attract tenants.
Ideally, you want to maintain a high occupancy rate, preferably above 90%, to generate income for your rental property consistently.
To calculate your occupancy rate, simply divide the number of occupied units by the total number of units available to rent.
Occupancy Rate = Number of Occupied Units / Total Number of Rental Units
For example, if you have a 20-unit apartment complex and all 20 units are rented, your occupancy rate would be 100%. However, if two units are vacant, your occupancy rate would be 90%.
While a 100% occupancy rate seems ideal, it might also mean you could be charging too little rent and missing out on maximized rental income. A healthy occupancy rate is between 92-96%.
Occupancy rate can also be used to analyze the overall demand for an area. Recently, the rental occupancy rate for the City of Houston was around 92%.
Gross Operating Income and Net Operating Income
Two metrics that shouldn’t be confused.
Before deducting expenses, gross operating income (GOI) is your rental property’s total revenue. This number includes all forms of rental income, such as rent from tenants, laundry fees, pet fees, HOA fees, and late fees.
Net operating income (NOI) measures your rental property’s profitability after considering all operating expenses of running your property, such as repairs, maintenance, utilities, and PITI (principal, interest, taxes, and insurance).
To calculate your net operating income, subtract your total operating expenses from your rental income. For example, if you’re earning $12,000 in rent each year and your operating costs are $6,000, your operating income would be $6,000.
Your net operating income is a crucial metric to track because it measures your rental property’s profitability. The NOI is a strong indicator of your ability to make money from a rental property.
Capitalization Rate
The capitalization rate, or “cap rate,” is a metric that measures your rental property’s return on investment (ROI). It’s a critical number to track because it allows you to compare different rental properties and make informed investment decisions.
To calculate your capitalization rate, simply divide your annual net operating income (NOI) by the current value of your property. For example, if your property is worth $100,000 and your annual net operating income is $6000, your capitalization rate would be:
($6,000 / $100,000) X 100 = 6 or $6.00/$100= 6%
In other words, for every $100 you invest, you’re getting six dollars in return.
These numbers indicate the risk level and potential return of your rental property. A higher capitalization rate means a higher ROI and a lower risk level, while a lower capitalization rate indicates a lower ROI and a higher risk level.
Expected Turnover Rate
Your expected turnover rate is the percentage of tenants you expect to move out of your rental properties each year. This number will vary depending on the type of rental property you own.
For example, a student apartment complex has a higher turnover rate than a family home because students generally only lease for one school year. On the other hand, families often stay in their rented homes for two or more years.
To calculate your expected turnover rate, divide the number of tenants you expect to move out each year by the total number of units on your property. For example, if you have a 20-unit apartment complex and you expect four tenants to move out each year, your expected turnover rate would be:
(4 / 20) X 100 = 20%
While this isn’t an exact science, anticipating the number of tenants you’ll need to replace on an annual basis is very important to long-term rental property budgeting. Finding new tenants can be time-consuming and costly for inexperienced landlords.
Cash Flow
Your rental property’s cash flow is the money you have left to spend (or save or invest elsewhere) after paying all operating expenses. This number is crucial to track because it indicates whether your rental property business is practical.
To calculate your rental property’s cash flow, subtract your total operating expenses from your total income. For example, if you’re pocketing $12,000 in income from your rental property each year and your operating expenses are $6,000, your cash flow would be:
($12,000 – $6,000) = $6,000
Your rental property’s cash flow is a forecasting tool that can help you predict how much expendable money you’ll have left after paying all operating expenses. This number is also a key metric to track because it indicates whether your rental property is profitable.
Gross Rent Multiplier
The gross rent multiplier (GRM) is a metric that measures the relationship between a rental property’s purchase price and its monthly rent.
To calculate your gross rent multiplier, simply divide the current market value of your property by the gross rental income. For example, if you’re purchasing a $100,000 rental property and the monthly rent is projected to be $1,200, your gross rent multiplier would be: ($100,000 / ($1,200 X 12)) = 6.94.
The gross rent multiplier is a key metric to track because it allows you to compare different rental properties and make informed investment decisions. In this case, the lower the number, the better.
Following KPIs Makes a Difference
Prudent investors should track key performance indicators to help assess the health of their rental property portfolio and make sound investment decisions. Doing so will help ensure your rental properties are profitable and provide you with the necessary information to make informed decisions about your investments.
At Residential Leasing & Management Corp, we have the experience and knowledge to help you make sound investment decisions. We are a full-service real estate company that specializes in assisting investors with all aspects of their rental property portfolio.
We provide our clients in the Greater Houston area with peace of mind by taking care of all the details, so they can focus on what’s important – growing their portfolio and achieving their investment goals.
Our wide range of services include property management, leasing, maintenance, and accounting. We also offer a variety of value-added services, such as market research and tenant screening. Our team of experts will work with you to create a customized property management plan that meets your specific needs.
Contact us today to learn more about how we can help you grow your rental property portfolio!
