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Property Investing as a Business: Understanding Key Financial Metrics - Article Banner

Investing in rental property makes you a small business owner. Whether you’re renting out just one home that you previously lived in yourself or you have an entire portfolio of diverse properties, you’re running a business, and you need to think about it that way. 

Successful businesses understand their numbers, of course. Do you know which financial metrics are most important to a real estate investor?

Depending on which experts you want to listen to, there are only two metrics you need to know or two dozen. While we can discuss everything from capitalization rate to net operating income, we’re going to focus on a few of the financial metrics that make the most sense to you, wherever you happen to be on your real estate journey. We’re going to focus on cash flow, total return, and return on investment (ROI). If you have a handle on those metrics, all the others will become apparent to you in due time. 

Cash Flow and Your Investment Property 

Cash flow is perhaps the first and most basic financial metric you can consider when you’re evaluating the performance of your investment property to think about how a potential acquisition may do on the market. It describes the profit you earn after your expenses have been paid in a given month. 

Add up all the rent you collect and subtract the expenses, which might be a mortgage payment, taxes, insurance premiums, etc. Whatever is left from that equation is your cash flow. 

In an ideal world, you’re earning positive cash flow, meaning the rental income you collect more than covers your expenses. Negative cash flow can happen, though, and it doesn’t mean your investment property isn’t profitable. 

This leads us to our next financial metric. 

Total Return and Your Investment Property 

Total return includes your cash flow, but also considers appreciation, depreciation, and amortization. 

  • Appreciation is the growth in value that you can count on for your rental property. It will be worth more when you sell it than when you bought it. 
  • Depreciation is the generous tax benefit you get from the IRS. Each year you own a rental property, you can depreciate it on your taxes for up to 27.5 years. 
  • Amortization is the pay down of your debt. Residents are essentially helping you pay down your mortgage, and that adds to your equity. 

Total return allows for negative cash flow and allows you to see the full picture of your investment’s value and profitability. 

Return on Investment (ROI)

Return on InvestmentThis is a term that gets thrown around a lot, but what does it mean? 

ROI is a financial metric that shows you what you’re earning on the money you’ve invested. If you put $100,000 into a property and you earn $10,000 on it, your ROI is 10 percent. Understanding your likely ROI is especially useful when you’re deciding which property to invest in. 

We love talking to new and experienced investors about how their assets are performing and what kind of metrics we can use to determine whether any big decisions need to be made. It’s a fun time to invest, but the market is lately making things more complicated. If you’d like some help, contact us at PURE Property Management. We’ll share everything we know and get you started on a successful investment path.