If you’re investing in real estate, then knowing how to calculate the commercial real estate return metrics is extremely important. That being said, it can be very challenging to figure out what metrics are important and which ones are less relevant for your own situation. With that in mind, here are some of the metrics that you should focus on at this time.
Equity multiple
This is basically the multiple of your initial equity and it’s used to identify the cash return for the lifetime of that investment. It takes into account the cash flow as well as any sale upside. The way you calculate this is “( Total profit + Equity invested ) / ( Equity invested )” .
By calculating this, it’s a lot easier to figure out if an investment is profitable or not, and you can see whether it will be worth the effort to invest in that or not. Every tiny detail matters when you’re an investor, and the equity multiple is particularly relevant in a situation like this.
Internal Rate of Return
The Internal Rate of Return is a great metric that shows the total return on the property. What it does is it helps you calculate the ROI by adding in the cashflow and upside. Basically, here you want to use this equation: “[ ( Sale Price + Cash flow ) / Initial equity outlay ] / number of years you held the investment”.
Cash-on-cash return
When you rely on debt to buy a property, then you can use the Cash-on-cash return metric to see just how much of a return you are getting every year. The way you calculate this is you divide the free cash by the equity put into the deal. It’s important to understand just how much you are investing and how relevant it is, as it will make the process a lot more important and interesting to begin with.
Cap rate
The cap rate is a very common term when it comes to real estate investment. You can calculate the cap rate when you divide the net operating income to the purchase price. When you calculate this, you obviously want the number to be as low as possible. That means the property is not that risky to invest in, and it will be easier for you to make the right investment.
Conclusion
It’s always important to know the real estate return metrics for your investment, and these are by far some of the pivotal ones. Once you understand these metrics, you need to monitor them as often as you can. It’s one of those things that can make a huge difference, especially if you’re new and you want to make the right investment. Studying the market, analyzing every possible investment and knowing how to manage everything accordingly is extremely important. Yes, there will be challenges as you try to invest properly, but with the right metrics it will be easier to identify the best opportunities!