Basic Accounting Metrics and KPIs for Landlords

Metrics and Key Performance Indicators (KPIs) are essential ways of monitoring any business’s health. In the real estate industry, rental KPIs offer valuable insights into your properties’ performance, helping you spot areas for improvement and adapt your strategy accordingly.

You won’t know if your duplex is underperforming or your SFHs on a certain side of town haven’t been retaining tenants unless you take stock every so often. And while inputting some numbers into a spreadsheet or calculator is a good start, translating the results into actionable insights often takes deeper analysis.

In this article, we’ll review the top twelve rental property metrics and KPIs every landlord and real estate investor needs to know, along with tips for interpreting them in your context.

#1 Cash Flow

Cash flow is a basic accounting metric that measures an investment’s cash in compared to cash out over a specified period. Annual net cash flow measures the amount of money your property generates on a yearly basis after expenses and debt are subtracted.

Annual net cash flow = Net operating income (NOI) – debt service

To find your annual net cash flow, you’ll need to know your net operating income (NOI) and debt service. Net operating income is your effective take home money – found by taking all your incoming cash and subtracting all your regular operating expenses. Your debt service is simply the total you spend on debt payments over a year (for a rental property, this is usually equivalent to your monthly mortgage payments, principal and interest, times twelve).

Cash flow is a relatively simple way to gauge whether your rental property is generating enough income to match or exceed its expenses. The higher your cash flow, the more profit you generate and the more cash you can use to invest in other properties. However, it’s important to remember that there is no such thing as an unanimously “good” cash flow. Cash flow also excludes important factors like appreciation, which if high, might make cash flow a less important factor for an investor.

#2 ROI

Return on investment (ROI) is one of several real estate metrics used to evaluate the annual return of an investment. ROI measures profitability using the percentage of profit a property generates relative to the initial investment made in it.

To calculate ROI, simply divide your annual return (your income minus your debt service and operating expenses) by the cost of your initial investment. If you financed the property purchase, your initial investment is your down payment, closing costs, and any upfront repairs. If the property was a cash purchase, the initial investment is simply the purchase price.

Return on Investment (ROI) = (Annual return / Cost of initial investment) *100

ROI is most useful when venturing into a new real estate investment, but it can also be helpful in evaluating an existing investment. If you understand its formula, you can determine which variables affect your return the most and manipulate those variables to increase profitability. For instance, ROI might help you decide to make a lower offer, increase rent, or refinance your mortgage.

Our only caution is that like all real estate investment metrics, ROI is not the end-all-be-all. Its formula neglects factors that will almost certainly affect your overall return, such as appreciation growth or rising insurance rates. Consider it in context with other indicators, and ROI can be a useful tool for any investor.

#3 NOI

Net operating income (NOI) is a simple metric that measures income after regular, monthly expenses are subtracted.

Net operating income (NOI) = Gross operating income – Annual operating expenses

NOI has many uses, but one of the most important is to give investors a decent idea of income potential during the deal analysis stage. NOI is a quick calculation that signals the overall financial health of an investment and indicates potential problems like pricing or vacancies.

#4 Cap Rate

Capitalization rate, or cap rate, is a 12-month assessment that measures the rate of return a rental property is expected to generate – in other words, how quickly an investor will make back what they spent on it.

Cap rate is calculated by dividing the property’s net operating income by its current market value, which may be influenced by factors like gradual appreciation and housing demand.

Cap rate = Net operating income (NOI) / Current market value

A higher cap rate indicates a higher potential for return, but it requires the investor to take on more risk (e.g., generally more volatile income and/or less predictable locations). A lower cap rate suggests a lower return but also less risk (e.g., more stable areas with reliable income). Most analysts consider a “good” cap rate to be somewhere in the 5 to 10% range, as this represents the best balance of returns and risk. However, this will vary depending on an investor’s individual preferences and risk tolerance.

Cap rate is a rental metric for potential long-term, income-generating investments. Because it considers several different variables (e.g., vacancy rates, expenses, and appreciation growth are all accounted for in the formula), cap rate is an effective way to compare properties and assess future profitability.

#5 Effective Rent

Effective rent is the actual amount of rent a landlord receives from their tenants, after subtracting any discounts or concessions they provide.

For instance, let’s say a landlord wants to rent a few units at the market rate of $1,400 but is having trouble finding tenants in the leasing off-season. To attract applicants, she instates a three-month rent discount for new tenants who sign a lease between November 1st and January 31st. These units will still be listed at $1,400, which is the official rental rate tenants will agree to in their lease agreements. However, for the first three months, the rate will be reduced to $1,100 as a discount.

For a true picture of incoming rent, this landlord must account for the $300 discount and subtract a total of $900 from each unit she fills with the discount. This is called the effective rent, and it’s a critical piece of information for property owners who fill their units this way.

#6 LTV Ratio

Loan to Value (LTV) ratios are an assessment of lending risk. They measure the percentage of cash borrowed compared to an asset’s value and are commonly used by lenders to assess eligibility for loans.

LTV Ratio (%) = (Amount owed / Value of asset) *100

High LTV ratios indicate higher risk borrowers. Lenders may require borrowers with a high LTV ratio to purchase private mortgage insurance (PMI) to protect them in case of default. Low LTV ratios indicate low risk borrowers to whom lenders are more likely to offer low interest rates and better terms.

For real estate investors who finance their deals, LTV ratios are extremely important. It’s also an informative way to evaluate and track your current equity in a property and compare it to other investments in your portfolio.

#7 Gross Rent Multiplier

Gross rent multiplier (GRM) is a ratio of a rental property’s market value to the yearly gross rental income it generates. It’s a standardized metric often used to compare possible investments and weigh their potential income with their costs.

Gross rent multiplier (GRM) = Fair market value / Gross rental income

Experts say that a GRM between 4 and 7 is generally considered indicative of a strong investment with good cash flow, priced low compared to its income potential. A higher GRM (8+) means the property is priced quite high for the potential income it could generate, meaning more expensive costs with slower returns.

GRM is most helpful as a quick initial screening method or a component of deal analysis, used to quickly determine whether a potential deal is worth pursuing further with a more granular analysis. Keep in mind that contextual factors like upfront renovations and appreciation may also influence your decision on a deal regardless of its calculated GRM.

#8 Cash on Cash Return

Cash on cash (CoC) return is the ratio of cash earned on cash invested in a property. It’s calculated using a simple formula based on cash flow (either positive cash flow or negative cash flow) and the initial investment amount:

Cash on cash return = Pre-tax annual cash flow / Total cash invested

A “good” CoC return varies based on your specific market and investment. However, a good standard is around the 8-12% mark. If your return falls in this range, you will likely recover a strong amount of capital from the initial investment each year.

CoC return is commonly used during the first few years of owning a buy-and-hold investment property to evaluate its returns. It can also be used as one factor in a quick comparison analysis between multiple potential deals.

#9 Operating Expense Ratio

A property’s operating expense ratio (OER) is precisely what it sounds like: A ratio comparing operating expenses to income. This financial metric is calculated by dividing all a property’s operating expenses (excluding depreciation expenses) by its operating income.

Operating expense ratio = Total operating expenses / Total revenue

When it comes to OER, lower is better. Low ratios indicate desirable investments where expenses are minimal relative to income. High ratios indicate a higher expense burden with less income to offset them. Investopedia recommends investors aim for an ideal OER between 60% and 80%. There is necessarily a minimum threshold of operating expenses required to maintain a property in good condition, but increasing income can ultimately affect this ratio positively as well.

#10 Occupancy/Vacancy Rate

One KPI real estate investors often forget is their overall occupancy or vacancy rate. Rental occupancy rate is calculated by dividing the number of occupied units by total units. For vacancy rate, you would use the number of unoccupied units.

Rental occupancy rate = (# of occupied units / Total # of units) *100

Tracking your occupancy/vacancy rates over time is critical to understanding how effectively you or your property manager are filling units and what can be done to limit vacancies in the future. A high vacancy rate could mean you need to shore up the tenant turnover process, increase spending on marketing, or simply that the rental demand in the area’s real estate market is declining and a more in-depth investigation is warranted. Filled units means more income and a higher performing rental property, so keeping a tight eye on vacancies is key.

#11 Tenant Retention Rate

Tenant retention rate is another frequently overlooked KPI, but it’s one of the most critical rental property metrics for landlords focused on keeping great tenants over time.

Your tenant retention rate measures the percentage of tenants who keep an active lease with you for a given time. This could be a one-year, three-year, or even five-year analysis. To calculate it, divide the number of tenants who stayed within your chosen period by the total number of tenants.

Tenant retention rate = # of tenants who stayed / Total # of tenants

High retention rates indicate that tenants are generally happy with their living arrangement. High retention could be traced back to reasonable rents, satisfaction with maintenance, effective property management, good locations, useful amenities, or any number of other factors. To find out the specific reasons your tenants are staying over the years, consider sending out a survey to tenants in that category.

On the flip side, low retention rates indicate a problem requiring further investigation. If you have low tenant retention, you could similarly send out a survey asking tenants who requested to terminate their lease to name the reason they’re leaving. Keep in mind that low retention may not always be due to a factor within your control. While tenants could certainly terminate due to poor maintenance, noisy neighbors, or high rents, others will cite space concerns, needs to accommodate a growing family, job changes, or other external factors.

#12 Tenant Satisfaction

Every landlord wants to know what they’re doing right, and the best way to find out is to conduct a tenant satisfaction survey. It may not be strictly accounting-related nor a precise estimate of profitability, but it’s nonetheless an invaluable metric that can help you glean critical insights. What you learn could help you increase occupancy rates, attract higher-paying tenants, increase your retention and renewal rates, and more generally, make your existing tenants happier and more likely to stick around.

To estimate tenant satisfaction, design a survey asking tenants to rate their overall satisfaction on a given scale (e.g., 1-5). You may also want to ask targeted questions about specific aspects of your rentals (e.g., maintenance, management, ease of rent payments, etc.). Averaging the scores from completed surveys will give you an estimate of the average tenant satisfaction at your community.

Without reliable tenants, you’re out of business—which is why tenant satisfaction is such an important KPI real estate investors should pay close attention to.

Conclusion

Tracking rental KPIs and metrics is more than just aimless number-crunching. The above twelve metrics are tools, each of which can give you a slightly different perspective of the health and progress of your investments. By focusing on a varied pool of indicators, you will have the clearest picture possible of how your properties are performing and where adjustments are needed. Ultimately, these metrics are your roadmap to smarter growth and a thriving rental portfolio in any market.