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A great, simple question and one I am happy to contribute to...what are my top three metrics when assessing an investment property?
It may vary slightly depending on the investing strategy adopted, so a flip might be different to a single-let buy and hold and an HMO may be different to a lease option say, however in essence they boil down to the following:
- ROI / CoCR - Return on Investment (strictly speaking Return on Capital Employed) or Cash on Cash Return defined as net income (after ALL costs and provisions, Incl. voids and maintenance) / cash left invested in the deal (could be after refinancing). I have a variation for flips looking at net cash out / all cash in.
- Net Equity Gain - This allows me to compare flips to long-term holds as I look at how much actual cash (flips) or additional equity generated (holds) is left in the deal after my initial intervention (e.g. discount, refurb and sell / refinance). I can then decide whether to go into a flip deal or a buy-refurb-refinance deal if both presented at the same time based on limited investment funds. This allows me to undertake an ‘opportunity cost’ evaluation on deals available when I am ready to invest.
- Net Monthly Cashflow - the net cash left in my hand each month, again after allowing for ALL operating expenses and provisions (I set aside or provide for sums to allow for voids, maintenance & repairs in addition to the obvious). This will not apply to flips and so in that case I want to know how soon my funds will returned to me, to judge whether to undertake a short-term flip or a longer-term buy and hold.
I was interested in a few of the other metrics identified from other investors listed here, including:
- DealGrader Score from Marco Santorelli as this allows a complex set of economic drivers to be modelled for an area…like that idea!
- Time to sell/rent – a few investors mentioned this metric and I think it is an essential aspect of the due diligence we investors need to consider, if not in the top three for me it will still be part of my deal evaluation. There is no point taking on a great looking deal on paper if the actual reality is that the timescales are not achievable and in fact poor metrics here are a suggested of a poor demand area in any event, so highly valuable.
- Delinquency as mentioned by Jake Durtschi is another one that can uncover the potential hidden costs of an investment…but it is tricky to identify. Clues lie in the time to let and ratio of rent agreed to total rentals on the market as a topline screen (there are similar metrics for flips).
- Debt Coverage Ratio again from Jake is also an absolute must for me – I need to know that I have some breathing space should my attractive initial mortgage rate revert to a higher SVR or should interest rates rise in the future. I look at this by working out my yield on debt and ensuring that this return is more than 3% above my mortgage rate.
- Price per foot/metre as mentioned by Andrew Fortune is another good one to look at and yet not one that I have relied heavily upon as a metric in this format. I tend to look at good local comparisons to get an idea that I am getting value for my property – this is similar, yet less scientific than £/square foot therefore.
- Sharon Vornholt refers to the After Repair Value (ARV) and the 70% rule, which is another parallel to one that I use when looking at deals where I can add value by undertaking a refurb. My metric is the ARV needs to be at least 50% higher than my purchase price as an initial screen. I then need to look at the actual costs of refurb to ensure that I get a ‘return on improvement’ of at least 150%.
- Rich Danby makes some excellent points that point to tenant (and buyer) demand by looking at some of the local investment fundamentals, such as population, jobs, amenities and transit – all of which I consider with my ‘STAR criteria’ if you have read some of my previous insights.
Finally, another one that I don’t see mentioned but implied by some, including me is Payback Period (or Break-Even Period), which is the time it would take to fully recover my investment funds from the returns possible (rental, refinance or sale). I look at twelve months as a maximum but am increasingly looking at shorter Payback Periods wherever possible, as this allows a greater ‘Deal Velocity’, or in plain speak – doing more deals, more frequently. I could do a complex conversion with my money out for a year or more, or perhaps I could do two light refurb projects and a flip at the same time during this same period…I would weigh up all of my metrics to decide which way to go here.
So what are your top three property investment metrics then?
Source & credits: Jacob Grant Property Management