In this episode of Get Real Wealthy Season 2, Quentin talks about the key metrics every real estate investor should know about.
Metrics are a way for you to use tools to identify where you are, and where you're going. Some matrix can help you when you are evaluating a property while others can help you in the investing phase. One of the first things to look at is Cash on Cash Return, which helps you evaluate how much profit you've made in a year. Another key metric that you use in real estate investing is called Cap Rate. The formula for Cap Rate is equal to Net Operating Income (NOI) divided by the current market value of the asset. It depends on three different factors: the condition of the property, the location of the property and interest rates. He adds that if you go to a different area, you may find a different cap rate. It comes in handy when you are trying to identify an opportunity.
Another key metric that we use is called an Annual Rate of Return. It is the amount earned on an investment over a 12-month period, and is usually expressed as a percentage. He adds that it comes into play when we are refinancing or selling an asset, adding “that usually happens on the sale or refinance of an asset, the shortest time that I've ever been able to do that is a year, the longest time I've been able to do that is four years in an apartment building.” The last metric you should know about is the Internal Rate of Return. Internal rate of return (IRR) is the discount rate at which a project’s returns become equal to its initial investment. It is the percentage of returns that a project will generate within a period to cover its initial investment.
In conclusion, he says that as an investor, you should be familiar with metric such as Cash on Cash Return, Cap Rate, Annual Return, Internal Rate of Return, so that you can make informed and profitable decisions.