Multifamily Investing Top KPIs

So you invested in a real estate syndication as a “passive investor.” Now what? It’s time to track your investment by following the top multifamily investing key performance indicators (KPIs.) What are those you ask? Let’s check out the following list.

Multifamily Investing Top KPIs

As an investor, there are many key indicators you can track when assessing the performance of a multifamily property. Here are our top picks:

Operational

1. Cash Flow: Cash flow is a crucial indicator for investors, representing the income generated from the property after deducting operating expenses and debt service. Positive cash flow indicates a profitable investment.
2. Net Operating Income (NOI): NOI is an essential metric that reflects the property’s profitability. It is calculated by subtracting operating expenses from total income, excluding financing costs. A growing NOI suggests improved financial performance.
3. Occupancy Rate: The occupancy rate indicates the percentage of occupied units in the property. High occupancy rates generally imply stable rental income and tenant demand.
4. Rental Income Growth: Tracking the growth of rental income over time helps assess the property’s income potential and market demand. Increasing rental income signifies improved cash flow and potential appreciation.
5. Operating Expenses: Monitoring operating expenses is crucial for investors. It includes costs such as property management fees, repairs and maintenance, insurance, utilities, and property taxes. Efficient expense management can positively impact cash flow and overall profitability.
6. Return on Investment (ROI): ROI reflects the overall profitability of the investment by considering factors like rental income, property appreciation, and expenses. It helps investors evaluate the effectiveness of their investment and compare it to alternative investment opportunities.
7. Market Rent and Vacancy Rates: Understanding the local rental market and vacancy rates provides insights into the property’s potential for rental growth and tenant demand. A strong rental market with low vacancy rates indicates a favorable investment environment.

Non-Operational

1. Debt Service Coverage Ratio (DSCR): DSCR measures the property’s ability to cover its debt obligations. It is calculated by dividing the property’s net operating income by the total debt service payment. A higher DSCR indicates a more secure investment with better debt coverage.
2. Property Appreciation: Tracking the property’s value appreciation over time is crucial for investors. Appreciation can contribute significantly to the overall return on investment, and monitoring market trends helps assess the property’s long-term potential.
3. Capitalization Rate (Cap Rate): Cap rate is a measure of the property’s return on investment. It represents the ratio of the property’s net operating income to its value or purchase price. A higher cap rate indicates a potentially better return on investment.

By monitoring these key indicators, investors can gain a comprehensive understanding of a multifamily property’s financial performance, potential risks, and growth opportunities, aiding in informed decision-making.

Examples

Here are examples of each of the key indicators for an investor assessing the performance of a multifamily property:

Operational

1. Cash Flow: Let’s say a multifamily property generates $10,000 in rental income per month and has operating expenses of $6,000, including property management fees, maintenance, utilities, and taxes. The cash flow would be $10,000 – $6,000 = $4,000 per month.
2. Net Operating Income (NOI): Assuming the property’s annual rental income is $120,000 and its annual operating expenses amount to $80,000, the NOI would be $120,000 – $80,000 = $40,000 per year.
3. Occupancy Rate: Let’s say a multifamily property has 50 units, and currently, 45 of them are occupied. The occupancy rate would be (45/50) x 100 = 90%.
4. Rental Income Growth: If a property’s rental income was $100,000 in the previous year and increased to $110,000 in the current year, the rental income growth would be ($110,000 – $100,000) / $100,000 = 10%.
5. Operating Expenses: Consider a multifamily property with annual operating expenses of $60,000, including property management fees, repairs, maintenance, insurance, utilities, and property taxes.
6. Return on Investment (ROI): Let’s assume an investor purchased a multifamily property for $1,000,000 and received a total return (including rental income and property appreciation) of $200,000 over a five-year period. The ROI would be ($200,000 / $1,000,000) x 100 = 20%.
7. Market Rent and Vacancy Rates: Consider a rental market where the average rent for similar multifamily properties is $1,500 per month. If your property is commanding a rent of $1,700 per month, it suggests potential for rental income growth. Additionally, if the vacancy rate in the market is 5%, indicating high demand, it further supports the property’s investment potential.

Non-Operational

1. Debt Service Coverage Ratio (DSCR): Suppose a property’s annual net operating income is $100,000, and its annual debt service payment (mortgage payment) is $80,000. The DSCR would be $100,000 / $80,000 = 1.25.
2. Property Appreciation: Suppose an investor purchased a multifamily property for $1,000,000, and after five years, its market value increased to $1,500,000. The property appreciation would be $1,500,000 – $1,000,000 = $500,000.
3. Capitalization Rate (Cap Rate): Suppose an investor purchases a multifamily property for $1,000,000, and the annual NOI for that property is $80,000. The cap rate would be ($80,000 / $1,000,000) x 100 = 8%.

These examples illustrate how each key indicator can be calculated or assessed to evaluate the performance and potential of a multifamily property from an investor’s perspective.

Which KPI is the Most Important?

The short answer is that they are all important. The long answer is really a combination of your understanding of the deal, your personal risk tolerances, and your relationship with the general partner.

It’s your money and no one will take as much interest in how it’s growing as you do.

Why Do KPIs Matter?

From and owner’s point of view, Lord Kelvin is spot on about why multifamily investing KPIs are important. It is also important from the passive investor’s viewpoint so you can track if the investment is hitting it’s original business plan. I.E. is it performing as advertised?

How do you track your investments?