After assembling a business plan for a multifamily investment and completing the underwriting, it’s time to begin monitoring performance. Keeping a close eye on reporting for the asset will aid in measuring the health of the investment.
After assembling a business plan for a multifamily investment and completing the underwriting, it’s time to begin monitoring performance. Keeping a close eye on reporting for the asset will aid in measuring the health of the investment. However, knowing which metrics to monitor can be tricky as not all will provide asset owners with the information required to understand if the property is achieving the business objectives.
KPIs or Key Performance Indicators, provide a system of measurement to help asset owners measure, track, and analyze the asset’s operational and financial health. They also provide data to help owners stay on track with the goals and milestones addressed in the business plan.
In this article, Lucern Capital Partners CIO Frank Forte dives into four key metrics a multifamily owner-operator needs to track to determine if the business plan is on the path to success.
1 | Revenue growth
While it may seem obvious, tracking revenue growth is essential to the execution of the business plan. Revenue growth is on top of the list of financial metrics for asset owners because it indicates how fast the property is growing. If revenue growth is advancing more rapidly than average, then there is a good chance that the company will meet its goals and objectives. However, if revenue growth is declining, even with increased revenues, then there may be something off with the underwriting and deeper analysis would be required.
2 | Occupancy rate
Retaining and acquiring tenants is fundamental to the success of a multifamily real estate investment property, so it should come as no surprise that occupancy rate is a significant KPI to measure. Occupancy rate is the percentage of an asset’s total available units that are currently leased and is calculated by taking the number of occupied units in a building and dividing by the total number of units. It can be used as a measurement tool to determine the demand for a property and can help discern if any of the completed value-add projects positively impacted the bottom line.
3 | Net operating income
This is an important metric to analyze as it provides the asset owner with a quick idea of the expected return for the property and can help easily compare one asset to another. Calculating Net Operating Income is simple as the owner simply takes the operating expenses and subtracts it from the gross operating income (i.e., rental income + all other income).
4 | Net Cash Flow
The amount of cash flow generated from a multifamily property is a key factor in determining whether or not the business plan is succeeding. It is calculated by taking the difference between a property’s income and expenses. If cash flow is stable and high, it is a good indicator that the property is performing strongly, and tenants enjoy living there. The more a property is cash flow positive, the better the long-term returns and the more of a ‘what if’ cushion is created for emergency repairs.
Summary
Proper reporting metrics and monitoring of those metrics can provide insight on whether a multifamily value-add business plan is effective in reaching the asset owner’s business plan objectives. Determining which metrics are most relevant track is one of the most important factors to driving growth and long-term investment returns.