Real estate design is the measurement standard used to analyze the financial characteristics of real estate investment property. In a general sense, real estate benchmarks refer to the comparison of potential real estate investment properties to a predetermined measurement framework. In a narrow sense, the term real estate comparator refers to a specific real estate indicator used to measure real estate properties.
Individual indicators are referred to as key performance indicators, or KPIs for short. Examples include net cash flow, total rental income, or internal rate of return.
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Overview
Real estate comparisons consist of a group of real estate financial indicators and their benchmarks. Indicators in general allow investors to remove emotion and speculation from investments; this is true not only in real estate investing, but on other types of investments such as stock trading or currency. Indicators are very important in real estate as they relate to physical entities - bricks and mortar structures, which may trigger investor emotions based on architecture and beauty.
The process begins by setting benchmarks for each indicator based on their acceptance/rejection criteria; which is then used to compare the desires of real estate property; thus providing context and reference points on the financial characteristics and profitability of the property.
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Types of real estate benchmarking indicators
There are many indicators of real estate finance, but the most valuable for benchmarking (especially for revenues that generate real estate investments) are:
- Gross rental multiplier: Calculates the market value of the property.
- Cash on cash return: Measures the return on the cash invested.
- Profitability index: Measures the cost benefits for property investment.
- Internal rate of return: Measures financial efficiency and investment property desires.
- Debt coverage ratio: Find out if property generates enough money to cover debt.
- Cashback rate: Estimates of how vulnerable a property will fail to pay its debts if rental income decreases.
- Loan-to-value ratio: Calculates the ratio between the loan balance and the market value of the property expressed as a percentage.
- Capitalization rate: Measures earning ability of an income generating property.
- Net cash flow: Calculates net cash flows from property after disbursement.
Real estate indicator
The benchmark acceptance/decline value for each indicator varies from investor to investor, the investor adjusts the starting/gauge value according to the risk tolerance level and investment objectives.
The following table provides a reference point about typical acceptance/rejection arrangements for each indicator.
There is no magical acceptance/rejection criterion for benchmarking indicators, every investor needs to make a determination of which criteria are appropriate for each particular situation.
References
- Sampson, Sabrina (2009). Areas of real estate that are profitable.
- Cabrera, Juan (2009). Management and Real Estate Risk Metrics.
- Reisbeck, Tilman/SchÃÆ'¶ne, Lars (2009). Immobilien-Benchmarking. Ziele, Nutzen, Methoden und Praxis [1]
Source of the article : Wikipedia
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