If you want to know whether you’re succeeding as a rental property owner, follow the financials.
Having a reliable accounting system is essential. It gives you a clear view of your income, expenses, and overall financial health. But if you’re serious about growing a successful real estate investment business, you need to dig deeper than just the basics.
So, how can you tell if your investments are truly profitable?
The answer lies in your financial metrics. These figures are your guideposts, but interpreting them can vary greatly depending on your goals and management style. Ask ten different real estate professionals what numbers matter most, and you’ll likely hear ten different answers. Some focus on high-level indicators, while others dive into detailed spreadsheets full of ratios and performance benchmarks.
So which metrics really matter, and how can you make sense of them?
When it comes to tracking the financial performance of your rental properties, there are a few metrics that stand out above the rest. Let’s take a look at those and make sure you understand the importance of following them for your own properties.
Net Operating Income (NOI)
We could start with cash flow or ROI or any of the important metrics we’re about to talk about. But this one, we think, is especially important.
Net Operating Income is the total income a property generates, minus all necessary operating expenses (excluding mortgage payments and taxes). It’s a key indicator of a property’s earning potential.
Here’s the NOI formula:
NOI = Gross Rental Income – Operating Expenses
Why does this particular metric matter so much? NOI gives you a clear picture of how much your property is earning before debt service and taxes. It’s used by lenders to assess loan qualifications and by investors to value properties. A higher NOI generally means a healthier property.
As property managers, we like to track NOI monthly and annually. We look for trends or sudden changes in expenses, and explore opportunities to boost income. This might mean raising rent or focusing more aggressively on reducing turnovers. It might also mean cutting costs through utility optimization and renegotiating service contracts.
Cash Flow
This is a term we use a lot, but what are we talking about when we talk about cash flow? It’s the amount of money you pocket after covering all property expenses, including mortgage payments. The formula looks like this:
Cash Flow = NOI – Debt Service (Mortgage Payments)
Cash flow determines whether a property is generating profit or draining your resources. Negative cash flow isn’t always a deal-breaker, especially if appreciation potential is strong, but it must be managed carefully. Use actual income and expenses, not projected expenses and rent collection figures. When you’re calculating cash flow, you want to include a buffer for unexpected repairs and vacancies.
Cap Rate (Capitalization Rate)
Cap rate is a measure of return based on the income-producing potential of a property. The formula is:
Cap Rate = (NOI / Property Value) × 100
Investors can use cap rate calculations to compare different investment opportunities, especially when looking at properties in various locations or asset classes. A higher cap rate typically signals higher risk but also higher potential return. You’ll want to use cap rate to assess market value or make acquisition decisions, but don’t rely on it alone. Always consider other metrics like cash-on-cash return and local market trends.
Cash-on-Cash Return
Cash-on-cash return measures the annual return on the actual cash you’ve invested in the property. Here’s the formula:
Cash-on-Cash Return = (Annual Cash Flow / Total Cash Invested) × 100
This metric tells you how hard your money is working. It’s especially useful for leveraged investments and helps compare real estate returns to other investments like stocks or bonds. Our pro tip is to include all out-of-pocket expenses in your total cash invested. This includes the down payment, closing costs, renovations, and other upfront fees.
Review Occupancy Rates
Occupancy rate is the percentage of time your rental property is occupied during a given period. This is an important metric because high vacancies are not compatible with profitability. When your occupancy rates are high, you know there’s strong demand, good tenant retention, and effective property management supporting your investment.
Occupancy Rate = (Occupied Units / Total Units) × 100
Use that formula to follow your occupancy rate, and if it drops below 90%, investigate the cause. It could be pricing, marketing, tenant turnover, or property condition.
Gross Rent Multiplier (GRM)
GRM is a simple ratio that compares the property price to its gross rental income. You’ll follow this formula:
GRM = Property Price / Gross Annual Rent
GRM offers a quick snapshot of how long it might take for a property to “pay for itself” in gross rent. It’s best used for initial comparisons and not as a standalone decision-making tool. Lower GRM generally means better value, but account for expenses, location, and property conditions before jumping in.
Loan-to-Value Ratio (LTV)
If you’re paying for your investments in cash, this metric won’t necessarily apply to you. But for most investors, LTV compares your loan amount to the appraised value of the property. Check out the formula:
LTV = (Loan Amount / Appraised Property Value) × 100
Why does this metric matter? LTV impacts your financing terms. A high LTV may lead to higher interest rates and stricter loan requirements. Lenders typically prefer an LTV of 80% or less. Those refinance opportunities often become attractive when property values rise and you can reduce your LTV. Lowering your LTV can also reduce private mortgage insurance (PMI) costs.
Debt Service Coverage Ratio (DSCR)
DSCR is an important metric because it shows how well your rental income covers your debt obligations. You’ll need your NOI to calculate results through this formula:
DSCR = NOI / Total Debt Service
Lenders use DSCR to assess your risk. A DSCR above 1.25 is generally considered strong, and it generally means your property generates 25% more income than is needed to cover debt payments. If your DSCR falls below 1.0, you’re operating at a loss. Review expenses, increase rents if possible, or consider restructuring your loan.
Maintenance and Capital Expenditures (CapEx) Ratio
This ratio compares your repair and CapEx spending to your rental income. Here’s your formula:
Maintenance & CapEx Ratio = (Annual Maintenance + CapEx) / Gross Rental Income
Properties that eat up more than 10-15% of income on repairs may not be sustainable unless rents rise or major upgrades are completed. It also helps you budget more accurately for future needs. That’s why you need to know where you stand. Track maintenance and CapEx separately—routine repairs versus roof replacements matter differently in long-term analysis.
Return on Investment (ROI)
Here’s a metric you surely recognize, and it’s used by just about every real estate investor we know. ROI measures your overall profit relative to your total investment. The formula you’re using is:
ROI = (Total Profit / Total Investment) × 100
ROI considers both income and appreciation, giving you the big picture of your property’s performance. It’s useful when deciding whether to sell, refinance, or hold. Calculate ROI annually and update it when significant changes occur—like refinancing or major renovations.
Break-Even Ratio
Take a look at your break-even ratio, which is going to tell you how much of your income is needed to cover all expenses, including debt. The formula looks like this:
Break-Even Ratio = (Operating Expenses + Debt Service) / Gross Rental Income
A break-even ratio over 85% could be risky. It means even a small dip in income could put you in the red. We recommend owners aim to keep this ratio as low as possible to maintain a buffer against market downturns or unexpected vacancies.
Appreciation Rate
Finally, you need to know your appreciation. This metric tracks the increase in property value over time. You likely know the formula, but here’s a refresher:
Appreciation Rate = [(Current Value – Purchase Price) / Purchase Price] × 100
While cash flow is usually a priority for a lot of landlords, appreciation can significantly boost your net worth. Monitoring it helps determine equity-building potential and timing for a sale or refinance. Use local market data to compare your property’s appreciation rate to the average in your area. Falling behind? Consider renovations or re-evaluate your investment strategy.
Successful rental property ownership hinges on more than just collecting rent checks. It’s about making data-driven decisions, managing risks, and proactively improving your assets. These financial metrics aren’t just numbers on a spreadsheet. Think of them as vital tools that empower you to:
- Evaluate the performance of each property
- Spot underperforming assets early
- Compare new investment opportunities
- Maximize returns and minimize losses
Start tracking these metrics regularly. Whether through property management software, a custom spreadsheet, or a property management partner. Your CPA can help, too. Make these part of your monthly and annual review process. The more informed you are, the more profitable your real estate journey will be.
Not sure how to effectively do all of this? We can help. Contact us at Anchor Down Real Estate & Rentals.
