#QuickTips: Common Metrics used to evaluate real estate
So you’re looking to invest in real estate, but how can you determine if the investment is a good one? We’ve detailed 3 simple ways to evaluate real estate below.
Cash Flow
Cash flow for real estate investment properties is generated from rent paid by tenants subtracted by expenses (maintenance, insurance, improvements, utilities, and taxes etc.) as well as associated financing payments (if any) — investors receive all the money leftover.
Net Operating Income
Net Operating Income, known as NOI, equates to the income the property is producing. This takes into account operating expenses but not non-operating expenses like financing and capital improvements.
Capitalization Rate
Capitalization Rate, or Cap Rate, is used as a rate of return and risk measurement. Often used to compare risk and return profiles of similar properties, a Cap Rate is calculated by the formula NOI/sales price (or market value). It is a useful metric to determine and justify the price or value of a property.
