Many landlords in Phoenix don’t realize that owning a rental property comes with learning a lot of new terms and formulas.
It can almost seem like a whole new language when veteran property owners start rattling off numbers and phrases you’ve never heard of.
Luckily, everyone has to start somewhere and even the most advanced and savvy investors probably didn’t know what DSCR means when they first started buying properties. So there’s no reason to be intimidated.
To get you started, here are 5 crucial rental property metrics landlords in Phoenix should know.
5 Rental Property Metrics Phoenix Landlords Should Know
Understanding cash flow and other vital numbers is crucial for landlords to make informed financial decisions. Let's delve deeper into these concepts to help educate Phoenix landlords.
1. Cash Flow:
Cash flow refers to the net income generated from a rental property after deducting all expenses. It is one of the most important financial metrics for landlords, as it determines the profitability of their investment.
Positive cash flow means the rental income exceeds expenses, while negative cash flow indicates costs exceed revenue.
To calculate cash flow, subtract all expenses (such as mortgage payments, property taxes, insurance, maintenance costs, property management fees, and utilities) from the rental income.
Positive cash flow allows landlords to cover expenses, allocate funds for property improvements, and potentially generate profits.
2. Cap Rate (Capitalization Rate):
Cap rate is a metric used to evaluate the rate of return on an investment property. It helps landlords assess the property's income potential relative to its purchase price. The formula for the cap rate is:
Cap Rate = Net Operating Income (NOI) / Property Value
Calculate the NOI by subtracting operating expenses (excluding mortgage payments) from the total rental income.
A higher cap rate indicates a higher potential return on investment. However, cap rates can vary based on location, property type, and market conditions, so comparing properties within the same market is essential.
3. Return on Investment (ROI):
ROI measures the profitability of an investment property relative to the initial investment made by the landlord.
It provides a comprehensive view of the property's financial performance, including cash flow and property appreciation. The ROI formula is:
ROI = (Net Profit / Total Investment) x 100
Net profit includes the rental income minus all expenses and any financing costs. Total investment encompasses the purchase price, closing costs, and renovation or improvement expenses. A higher ROI indicates a more profitable investment.
4. Gross Rent Multiplier (GRM):
GRM is a simple tool used to estimate the value of an investment property based on its rental income. It helps landlords quickly assess whether a property is priced reasonably compared to similar properties. The GRM is calculated as follows:
GRM = Property Value / Gross Annual Rental Income
A lower GRM suggests a potentially better investment opportunity. However, remember that GRM is a simplified method, and you should use it with other financial analyses.
5. Debt Service Coverage Ratio (DSCR):
DSCR means debt service coverage ratio and is particularly relevant for landlords who have obtained financing for their investment properties. It measures the property's ability to cover its debt obligations based on the rental income generated. The formula is:
DSCR = Net Operating Income (NOI) / Annual Debt Service
A DSCR greater than 1 indicates that the property's income is sufficient to cover its debt payments. Lenders often require a minimum DSCR when considering loan applications.
Key Financial Metrics for Landlords in Phoenix
These key financial metrics help landlords make informed decisions about property acquisitions, financing options, rental pricing, and overall investment strategy.
Regularly tracking and analyzing these numbers will help landlords assess their real estate portfolio's financial health and profitability.
Free Consultation With Phoenix Property Management Company
We know that investing in Phoenix rental properties can be complex at first and includes many new terms, phrases, and formulas. It’s probably a bit more complicated than you thought. But don’t worry, there’s plenty of help and resources out there.
One of the best resources for landlords is a local Phoenix property management company. Property management companies are experts at maximizing the ROI of rental properties and will be glad to answer any questions you have.
In fact, most property management companies will perform a free analysis of your rental property in Phoenix to find opportunities to increase your revenue.
Check out this blog next to learn more about owning rental properties in the Phoenix area.
