In order to track how profitable your properties are, you need to have a solid understanding of the financials of your rental business. Below are some of the key financial metrics that landlords need to know to successfully track a rental business’ profitability.
Net Operating Income (NOI)
As a landlord, you have many operating expenses – money spent on maintenance, utilities, property manager fees, or other regular costs of running your business. When you subtract your operating expenses from the revenue you receive from each property, you get your net operating income, or NOI. This number can be analyzed to figure out how profitable all your real estate investments are. Make sure that you do not include capital expenditures, mortgage payments, and interest in your operating expenses.
When deciding whether you have enough cash flow to cover loan payments, lenders often look at your net operating income and may make their decision partially off that. However, although NOI is a useful metric, you should keep in mind that projected rents could end up being inaccurate and income may be inconsistent, making your calculation incorrect.
Cash Flow
Cash flow shows you how much money you have left over after collecting revenue and paying expenses at the end of the month. If your cash flow is negative, you won’t be able to take home profit and will not have enough money to cover expenses. If you end up with negative cash flow, take the time to examine your expenses more closely and figure out where you can cut back. Also, if you have a tenant who only turns in partial payments or any other inconsistencies in your revenue, analyzing your cash flow could be a way to realize these issues.
Internal Rate of Return
Your internal rate of return (IRR) will estimate how much interest you will earn on each dollar invested in a rental property over the period of time you hold it. This will predict the long-term yield of that property.
Your net present value (NPV) is the value of money currently, rather than what its value is in the future after it accrues compound interest. Set the NPV of your property to zero and use projected cash flows for the years ahead that you plan on having the building to find your IRR.
Calculating your IRR can be tricky, so it’s best to use Excel’s IRR function to calculate it. Also, it’s important to understand that the IRR calculation assumes a stable rental environment, so it won’t factor in unexpected repairs or expenses.
Rental Income
Rental income is simply the amount of money that you get from your tenants over the course of a month or a year. This metric will measure the overall financial performance of your rental business.
If you track your rental income correctly, you can make sure that your prices remain competitive yet fair, all while generating enough money to cover your expenses.
There are several factors that impact your rental income. Your rental property’s location and condition, the market’s demand, and your competitor’s rates can all impact your rental income. Make sure that you also keep detailed records of all tenant payment and deposits. Keeping a great record with proof can protect you if you find yourself faced with disputes over security deposits or rent payments.
Occupancy Rate
Your occupancy rate tells you how appealing your property is to potential tenants by dividing the number of occupied units by the total number of units on your property, then multiplying that number by 100 to get a percentage.
If you track your occupancy rate over time, you can see when there may be an influx of tenants moving in or moving out at certain points in the year. For example, if your occupancy rate is historically high in May but low in January, you can change your rates and marketing strategies during these times to reflect those trends.
Also, if you have low occupancy rates, it’s a sign that you could need to renovate, adjust your rates, or change the way you market your property.
Conclusion
Though there are other financial metrics you should pay attention to, the ones listed above are some of the most telling and important data points for your business. By tracking these metrics, you should feel confident that you know what’s going on in your business financially. If you still feel that you need more insight into your financials, consider hiring a professional to analyze and interpret the numbers for you.