It is essential to have an idea about how to evaluate the property you seek. To invest in real estate, there are mathematical tools. These help you make easy the decision of skimming out the best plot, building or land. Understanding the science of these real estate indicators is mandatory. We have explained some of the most significant ones, down below:
Real Estate Indicators in Real Estate Business
Gross Potential Income (GPI)
The first on the list is Gross Potential Income. You can calculate it by simply multiplying 12 months by the per month rental expectation. This calculation gives you a measure of the income the property is expected to produce, exclusive of the credit loss due to vacancy.
Gross Operating Income (GOI)
The Gross Operating Income is a measure that is the same as gross potential income with a difference that in it, losses due to vacancy are incorporated.
When units are not engaged with rental tenants, costs of maintenance, repainting, rehab become active.
Gross Rental Multiplier (GRM)
You require Gross Rental Multiplier to have a quick comparison to decide if you want to do a more detailed analysis of a property.
If you are searching for residential areas in Lahore, you will find a variety of cool options. Here is when GRM statistics will help you bring the top priorities to the top.
Net Operating Income (NOI)
In Net Operating Income, operating expenses are inclusive. These are the costs of operations and maintenance works. Remember, not the depreciation factors are included here. Additional costs of advertisement, legal mechanisms, janitorial can also be a part here. Therefore, a pre-eminent figure of 5% is assumed as a good rule of thumb. If the property is old and in some low-income area, the maintenance costs of 20 % or more are anticipated.
Capitalization Rate (Cap Rate)
Capitalization Rate Is a tool used extensively around the real estate businesses. Especially apartment and commercial investors who want to calculate the value of a property with respect to its cash-flow. It is then compared with similar options in the market to find the best-fit property. It is determined by using the data of operating income and recent sale prices of other properties. The result is used to determine the current prices of properties.
By dividing net operating income by the full price of any property.
If NOI is PKR 50,000 and price is PKR 500,000, the capitalization rate will be 10%. It is a good figure. 8 or more cap rates are considered ideal.
Rent-to-Cost Ratio
For small houses and apartment buildings, Rent-to-Cost Ratio is an ideal real estate indicator. It gives an idea of the best suitable property for you that meet the needs well. The monthly rental income when divided by the total property price, you get this ratio.
If the monthly rent is PKR 50,000 and the home cost is PKR 5 crore, then by the formula: PKR50,000/PKR 5 crore = 0.011 or 1.1% is the rent-to-cost ratio.
Debt Service Ratio
If you get Debt Service ratio less than 1, after calculations, you are vulnerable to receive a loss. You can a value showing debt service ration when you divide your net operating income by your debt service. For PKR 30,000 NOI, the debt service if is PKR 25,000, we’ll say that debt-to-service ratio is 1.2- An acceptable one as is greater than 1.
Breakeven Ratio
When you add the debt service to the figure of your operating expenses and then go for dividing it by operating income, you ultimately get a figure that is called as breakeven ration. This real estate indicator is a popular one among lenders. This is because they want to have an idea of when the property will have paid all expenses of operation and turn into a gold-mine by offering profits.
Cash Flow Before Taxes (CFBT)
Cash Flow Before Taxes is calculated by subtracting capital cash and debt service from Net Operating income; in the result, the loan and interest incomes are added. This is a real estate indicator that helps you see what you will receive before taxes come into action. The cash flow before taxes gives you a closer leverage to estimate the real net return on the investments in property.
Cash Flow After Taxes (CFAT)
The cash flow when you subtracted the taxes is CFAT. The breakdown of this factor involves eensy-weensy details as minor and major cuts and adds are involved.
To know Real Estate Indicators is a must!
It is highly recommended to analyze the trends and get a know-how beforehand about the real estate indicators. In Pakistan, there are online portals like sirmaya.com that can help you with choosing wisely between a shiny investment and a cash-draining one.
