When first starting in India’s real estate investing, it’s critical to understand how to compare property prices in Mumbai, Hyderabad, Bangalore or any part of India you are looking out to invest in, their markets, and various other deal metrics.
Different-sized properties necessitate different levels of analysis but consider this a starting point for analysing a deal in India – be it two-unit duplexes or a complex.
Assessing a property deal as good or bad involves a careful analysis of various key components and metrics. It’s not just about the price; it’s about understanding the potential return on investment, the condition of the property, the location, and much more. This is where professional property management services can provide invaluable assistance. They have the expertise and tools to help you evaluate property deals effectively, ensuring you make informed decisions that align with your investment goals.
Performance Metrics in India’s Real Estate
1. Cash Flow
The money left over after all bills have been paid is referred to as cash flow.
Cash flow includes your debt service as an “expense.” We exclude debt service from the NOI calculation because NOI determines how much income the property generates regardless of the owner’s financing.
Your cash flow illustrates your total annual profit. Your cash flow will be reduced as your loan payments increase. If you pay cash for a property, your cash flow is exactly the NOI because that is the maximum cash flow of the property.
2. Capitalization Rate
The cap rate will probably be the most critical number in the property investment analysis. It is an unbiased figure that remains unaffected by the buyer or their financing. Because it is unaffected by the buyer or financing, it is the most accurate indicator of a property’s potential return.
Cap rates vary depending on where you buy, the asset type, the market, the property condition, the creditworthiness of the tenants, and the remaining lease term.
3. Internal Rate of Return
Calculating the Internal Rate of Return on a real estate investment is one of the most widely accepted methods of determining its profitability (IRR). This is a metric that expresses as a percentage the average annual return on a real estate investment that you have realised or can expect to realise over time.
Internal Rate of Return (IRR) is defined as a discount rate that causes the net present value (NPV) of all cash flows in a discounted cash flow analysis to equal zero.
The mathematical formula for IRR thus entails determining the discount rate, or interest rate, that causes all cash flows in the project to have an NPV of zero.
A project with a positive IRR indicates that you received a return on your investment while a negative IRR indicates that your investment is losing money.
When you use the IRR, you can properly weight cash flows that occur at different times to make apples-to-apples comparisons across investment opportunities.
4. Cash-on-Cash Return
This is a critical return-on-investment metric in real estate investing. It calculates the cash income earned on money invested in real estate.
This metric, also known as the cash yield, is commonly used to assess the performance of commercial real estate investments, but it can also be applied to residential real estate investments such as rental properties.
5. Return on Investment
ROI is a profit ratio. It calculates the amount of money or profit made on an investment as a percentage cost of the investment.
ROI demonstrates to real estate investors how well and efficiently their investment dollars are being used to generate profits. It also determines the performance of an investment.
Key Points That Determine A Good Real Estate Investment Deal
1. Calculating Net Operating Income
“Net operating income” is a critical metric in your financial analysis (NOI). This is the total income generated by the property after all expenses, excluding debt service costs—or your loan costs.
The net operating income (NOI) is a calculation used to assess the profitability of income-generating real estate investments. NOI is the sum of all property revenue less all reasonably necessary operating expenses. It is a pre-tax figure that appears on a property’s income and cash flow statement and excludes loan principal and interest, capital expenditures, depreciation, and amortisation.
2. Evaluating Property Income
Because tenant rent accounts for the majority of a property’s income, it is critical to account for the lease term and unit vacancy. Your property’s vacancy rate is likely to be higher or lower than the average, so you’ll need to take that into consideration when analyzing your property.
You’ll need to determine what you believe is a reasonable vacancy rate in the future—I always advise erring on the conservative side when underwriting a deal for a potential investment.
3. Other Typical Expenditures
Every property owner will also have to meet certain usual expenses and is therefore important to learn how to calculate their cost.
Repairs: Repairs are difficult to estimate because there are so many variables at play. When estimating potential repair costs, consider the property itself, its age, and its financial history.
Capital expenses: This refers to large-ticket items that must be replaced on a regular basis, such as roofs, parking lots, and HVAC systems, in order to extend the asset’s useful life. Estimate the cost of repair for each major system, divide it by the remaining lifespan, and set aside that amount each month.
Managing The Property: To rent out a unit, property management companies typically charge a percentage of the rent plus a fee. These figures may vary depending on your location, and proper due diligence must be performed by evaluating existing and potential property management companies.
While you can’t predict the future, a solid and thorough approach to analyzing an investment opportunity in India can help you determine objectively if a property is right for you.