Housing is one of the most basic human needs. Alongside food and water, shelter is one of our most basic requisites for survival. It’s no surprise, then, that it’s also one of the most secure and reliable investments that any REIT, holding company, or other investors can make.
Just like any other promising marketplace, however, residential property management is not without its risks, competitors, or downfalls. Indeed, as the free market dictates, wherever there’s opportunity, there’s competition — even sometimes to the point of overcrowding.
That being said, those who succeed in the property management space are those who know how to focus on what matters most — on what maximizes revenue in the short-, medium-, and long-term. And as a rule, property managers who focus on KPIs that support growth are not only successful in the short-term, but survive and flourish into the long-term and beyond.
Operational Property Management KPIs
There are a number of important operational KPIs that property managers can use to increase the performance and profitability of their residential and MDU properties. Indeed, these have to do with fundamental property overhead, and the more that a property manager monitors them, the more they can increase profitability by reducing their costs.
Occupancy Rates
Simply put, Occupancy Rate refers to the ratio of rented or leased units vs the total number of units within a rental property. Consequently, Occupancy Rate is also a vital KPI for property owners and property managers to gauge profitability.
The higher a property’s Occupancy Rate, the stronger the demand for those rental units, and the higher the potential rental income is for that property. Similarly, a lower Occupancy Rate signifies not only vacancies, but potential revenue loss.
Essentially, monitoring Occupancy Rates helps property managers make strategic decisions about rental pricing, marketing strategies, maintenance efforts, and other operational factors. In other words, Occupancy Rates are one of the first KPIs property managers look at to measure both financial performance and tenant satisfaction.
Rent-Ready Costs
When a unit turns over, do you know exactly how much it will cost to get the unit in rent-ready condition? Essentially, Rent-Ready costs refer to expenses when preparing a unit for rental. This can include repairs, renovation, cleaning, maintenance, as well as ensuring plumbing, electrical, and HVAC systems are in order.
Indeed, Rent-Ready Costs are also an investment in occupancy rates, tenant satisfaction, and the property’s value as a whole. After all, property managers that invest strategically in Rent-Ready Costs are more likely to both attract and retain tenants, fostering a more profitable rental business.
Revenue Growth
Revenue Growth refers to the increase in income generated from rental properties over a specific period of time. This property management KPI is typically driven by a number of factors, including, raising rental rates, reducing vacancies, property acquisitions, as well as implementing efficient management practices.
Indeed, there are a number of revenue growth strategies property managers turn to. From marketing and tenant retention campaigns to optimized pricing strategies and property upgrades, these strategies aim to not only increase income, but also improve overall operational efficiency. Calculating Revenue Growth, moreover, is as simple as comparing the difference in income from rental properties between two specific time periods.
Gross Rent
Gross Rent is the total rental income generated from a property before deducting any expenses and operational costs. It typically includes revenue received from tenants, including their base rent, in addition to fees for services and utilities, ranging from parking to maintenance charges.
In other words, Gross Rent offers property managers a brief overview of the property’s revenue potential. However, this property management KPI isn’t without its limitations. Indeed, Gross Rent does not reflect a property’s full profitability, as it doesn’t account for operating expenses. This can include property management fees, as well as property taxes. Net Potential Rent , by contrast, deducts these expenses to provide a clearer picture into a property’s income after taxes.
Market Rent
Market Rent , by contrast, refers to the amount of rent a property can command in the open market based on current demand and supply conditions. Essentially, this property management KPI reflects the rental rate tenants are willing to pay, as well as the amount landlords are willing to accept – comparable to similar properties in a given location.
There are a number of factors that can influence Market Rent, ranging from a property’s location, its condition, available amenities, as well as local market trends. Put simply, property managers that set rents at market rates (1) maximize rental income, (2) reduce vacancies, and (3) ensure tenants receive fair market value.
Financial Property Management KPIs
Of course, most businesses come down to a trade-off of money-in-money-out. In other words, property managers have to have not only a ‘grip on’, but a good sense of where their business is making money vs losing it, Fortunately, for property managers, there a few key KPIs that can help them track where the money’s coming in, and where it’s either leaking or hemorrhaging.
Net Operating Income (NOI)
Net Operating Income (NOI) represents the total income generated from a property minus all operating expenses required to maintain and operate that property, excluding mortgage payments and income taxes. NOI ultimately helps property managers evaluate a property’s potential returns, as well as its financial health.
Revenue streams taken into account by NOI include, but are not limited to, base rent, parking and maintenance fees, utility costs, and other value-added amenities. Common operating expenses, by contrast, can include property management fees, insurance, property taxes, and any costs associated with managing the property. Essentially, property managers that regularly monitor NOI gain direct insight into the potential profitability of a property.
CAP Rate
Capitalization Rate, also known as Cap Rate , represents the ratio between a property’s Net Operating Income (NOI) and its current market value or purchase price. In layman’s terms, Cap Rate refers to the rate of return an investor can expect from a property – assuming it’s purchased in cash.
So while a higher Cap Rate indicates a higher potential return on investment, a lower Cap Rates indicates a lower potential ROI. Property managers typically use Cap Rates to quickly gauge the profitability and risk of a real estate investment. That being said, other factors must be considered alongside Cap Rate, including property condition, comparables, market trends, and financing terms.
Cash-on-Cash Return
Cash-on-Cash Return (CoC) measures the annual pre-tax cash flow generated by an investment property, and is expressed as a percentage of the initial investment made by an investor.
For example, if a property management firm purchases a rental property at $300,000 with a down payment of $75,000 and additional closing costs of $10,000, their initial cash investment would be $85,000. If the rental property generates an annual pre-tax cash flow of $15,000, the CoC would be calculated as follows: $15,000 / $85,000 X100%.
In this instance, the investor’s Cash-on-Cash Return would be approximately 17.65%. In short, they would be earning a return of 17.65% on their initial cash investment of $85,000. In this way, CoC helps investors evaluate the profitability of a property vis-a-vis the cash they have invested.
Fair Market Value (FMV)
Fair Market Value (FMV) is the estimated price at which a property can effectively change hands between a willing buyer and seller. Essentially, FMV reflects the true worth of the property in an open and competitive market. Fair Market Value is typically influenced by a number of factors, including the property’s location, its condition, current market trends, as well as comparable sales of similar properties.
FMV ultimately helps property managers make informed investment decisions, set competitively-priced rental rates, and ensure fair pricing for leasing negotiations. Similarly, FMV is equally crucial for tax assessments and financial reporting, providing an objective measure of a property’s worth.
Annual Depreciation
Annual Depreciation refers to the gradual decrease in the value of a property over time. This property management KPI takes into account gradual wear and tear, deterioration, as well as obsolescence. Depreciation ultimately helps guide rent setting, evaluate a property’s profitability, and influences financing terms.
In acknowledging a property’s declining value, property managers can plan ahead for maintenance costs and future investments. Typically, depreciation is allocated over the property’s useful life using methods such as straight-line or accelerated depreciation. This, in turn, helps property managers reduce taxable income.
Rental Market KPIs
Every market is a tough one — and not only is property management no exception, but also an outlier. Rental market consumers are not only fickle, but unreliable. More to the point, they don’t have to pay for product/services delivered until after delivery — meaning that property managers take all the risk with no guarantee (whatsoever).
That being said, there are property management KPIs that property managers cannot only use to measure the performance of their tenant transactions, but the profitability of their lifecycle.
Market Rate
Market Rate is the prevailing rental price for properties similar in type, size, and location within a given market. For example, if two-bedroom apartments in downtown Chicago typically rent for $2,500 per month, that amount represents the Market Rate for comparable properties in that area.
Essentially, Market Rate reflects what tenants are willing to pay according to current market conditions. Determining Market Rate can be done by comparing similar properties, measuring demand and supply trends, and analyzing other local market conditions. Accurate assessment of Market Rate is crucial for maintaining occupancy levels, optimizing revenue streams, and ensuring FMV for tenants.
Rental Rate
Rental Rate is simply the amount a landlord charges for the use of a property. Common factors impacting Rental Rate include, but are not limited to, a property’s size, location, and condition, as well as available amenities and current market trends.
Of course, Rental Rates can vary significantly based on these factors. Indeed, properties offering extensive amenities often command higher rates than comparable properties in less sought-after areas. And determining a fair Rental Rate is essential for both attracting and retaining tenants, as well as maximizing the property’s income potential.
Net Potential Rent (NPR)
Finally, Net Potential Rent (NPR) is the total rental income a property can generate if all available units were leased at market rates. In other words, NPR assumes full occupancy and optimal conditions, evaluating a property’s income-generating potential. Indeed, full occupancy and optimal rental rates, while ideal, are rarely achieved in practice due to tenant turnover, lease expirations, and market trends.
NPR also does not account potential income losses for vacancies or non-payment, which can significantly impact rental income. Of course, when estimating the potential profitability of an investment, property managers must not only consider NPR, but also factor in vacancy rates, maintenance costs, and additional operating expenses.
Property Investment KPIs
At the end of the day, every investment is based on an expectation of not only a return, but of a reliable estimate of an ongoing return. That being said, there are some critical KPIs that impact not only property managers, but most investors or investors. And any serious or competent property manager would be remiss to overlook them.
Amortization
Amortization is the process of gradually repaying a debt (such as a mortgage or loan) over time through regular, scheduled payments. Essentially, these payments cover both the principal amount and the interest, with each payment reducing a portion of the balance of the loan.
For assets like MDUs and other multifamily properties, Amortization builds equity over time because as principal balance decreases, the borrower’s ownership stake in the asset increases.
Amortization schedules offer property managers a clear overview of how much needs to be paid each period. Moreover, Amortization schedules help property managers make informed decisions about refinancing or additional investment opportunities.
Capital Improvement
Capital Improvements refers to a significant upgrade, enhancement, or addition to a property. These improvements are typically done to extend the property’s useful life, increase its value, or adapt it for new uses. Unlike routine maintenance, Capital Improvements represent substantial investments that require considerable planning.
Common Capital Improvements can include but are not limited to, renovating a kitchen, installing new HVAC systems, improving overall energy efficiency, or upgrading electrical and plumbing systems across the property. Beyond increasing the value of the property, Capital Improvements are designed to attract and retain tenants, reducing vacancies.
Property Appreciation
Put simply, Property Appreciation refers to the increase in the value of a real estate asset over time. Typically, there are a number of factors that can contribute to this increase, including supply-demand dynamics, improvements made to the property, inflation, as well as location, location, location.
Indeed, a property located in a prime area near top-rated schools, shopping centers, and public transportation, is likely to appreciate more quickly due to high demand and the convenience it offers to potential buyers. It is, however, important to remember that Property Appreciation is not guaranteed.
Property Assessment
Last but certainly not least, a Property Assessment is the process of determining the value of a real estate asset. This evaluation is typically conducted by local government authorities and banks and is particularly crucial for taxation purposes, or when selling. Indeed, accurate assessments help buyers and sellers agree on a fair market value (FMV) for the property.
Several factors are considered during Property Assessments, including, the property’s physical characteristics such as size, age, and condition of its structures. Location plays an important role, as well as proximity to schools, amenities, and transportation naturally impact value. Moreover, Property Assessments take into consideration comparable property sales in the area.
KPIs: Key Perspectives & Insights
In many ways, insight is foresight. Insight provides us with crucial context, with the perspective we need to see the bigger picture. It allows us to see the moving parts up close, and the vectors they move along — and that helps us make better decisions.
Fortunately, for property managers, insight is not something that’s in short supply. There are many lenses through which they can examine their business. And just as each one offers a unique perspective, property managers should know which ones are most valuable for different decisions.