Real estate investment can be a rewarding way to build wealth, but understanding key investment metrics is essential for making smart decisions. Whether you’re a beginner or an experienced investor, learning these metrics will help you evaluate opportunities effectively.
1. Return on Investment (ROI)
ROI measures how much profit you make from your investment compared to the amount you invested. It’s calculated using the formula:
ROI = (Net Profit / Total Investment) x 100
For example, if you invested ₹10,00,000 and earned a profit of ₹2,00,000, your ROI would be 20%.
2. Gross Rental Yield
This metric shows the annual rental income you earn compared to the property’s purchase price. The formula is:
Gross Rental Yield = (Annual Rental Income / Property Price) x 100
If your property is worth ₹50,00,000 and you earn ₹5,00,000 per year in rent, your gross rental yield is 10%.
3. Net Rental Yield
Unlike gross yield, net rental yield considers expenses like maintenance, taxes, and insurance. The formula is:
Net Rental Yield = (Net Rental Income / Property Price) x 100
If your net income after expenses is ₹3,00,000, and the property price is ₹50,00,000, your net yield is 6%.
4. Capital Appreciation
Capital appreciation refers to the increase in the property’s value over time. If you bought a property for ₹50,00,000 and its value increased to ₹60,00,000, the appreciation is ₹10,00,000 or 20%.
5. Cash Flow
Cash flow is the money left after deducting all expenses from rental income. Positive cash flow means your income exceeds expenses, while negative cash flow means you’re spending more than you earn.
6. Loan-to-Value Ratio (LTV)
LTV compares the loan amount to the property’s value. Lenders use this to assess risk. It’s calculated as:
LTV = (Loan Amount / Property Value) x 100
If your property is valued at ₹50,00,000 and you have a ₹40,00,000 loan, your LTV is 80%.
7. Occupancy Rate
Occupancy rate shows how much of your rental property is occupied versus vacant. It’s calculated as:
Occupancy Rate = (Occupied Units / Total Units) x 100
If you have 8 out of 10 apartments rented, your occupancy rate is 80%.
8. Debt Service Coverage Ratio (DSCR)
DSCR indicates whether your rental income is enough to cover loan payments. The formula is:
DSCR = Net Operating Income / Loan Payment
If your income is ₹6,00,000 and your loan payment is ₹4,00,000, your DSCR is 1.5, meaning you have enough income to cover the loan.
9. Break-Even Ratio
This metric shows the occupancy level needed to cover all expenses without profit or loss. The formula is:
Break-Even Ratio = (Operating Expenses + Loan Payments) / Gross Income
If expenses and loan payments total ₹6,00,000 and income is ₹8,00,000, the ratio is 75%.
10. Price-to-Rent Ratio
This helps compare buying versus renting. It’s calculated as:
Price-to-Rent Ratio = Property Price / Annual Rent
If a property costs ₹50,00,000 and annual rent is ₹5,00,000, the ratio is 10, indicating it may take 10 years of rent to equal the purchase price.
By understanding these key metrics, you can make better real estate investment decisions and ensure long-term profitability. Stay informed and invest wisely!
