Sacramento Management Advice: How Do You Measure the Success of Your Real Estate Investment?

How do you know your real estate investments are successful? 

Ask this question to a group of experienced investors, and they’ll all have different answers. Your success looks different from the next investor’s success. That’s because you each have different goals, you’re working in different markets, and you’re growing a portfolio of vastly different properties. 

While defining success with a real estate investment can seem a bit subjective, you want to have metrics that can be reliably used to tell you whether or not a particular property is doing what you want it to do. 

Here are some of the ways you can determine the success of your Sacramento investment properties. 

Calculate Your Capitalization Rate 

One of the most common metrics you’ll hear in real estate investing circles is capitalization rates. Your cap rate will help you make good decisions by estimating your potential return on a property. Most investors will use cap rates to compare different properties in a market before they buy. 

It’s an easy calculation. Divide the annual net operating income by the cost of the asset or its known value. High returns require low cap rates. 

Look at your Net Cash Flow

Hopefully you have documented the rental income and expenses you’ve earned on your rental property investment. With an income and expense report for your investment property, you can calculate your net cash flow to determine how your property is performing. 

Calculate the gross income for the year subtracting the total expenses for the property, which provides the net operating income (NOI). If you have a mortgage or investor partners on the property, deduct your debt service payment to get your net cash flow of the property.

The net cash flow can help you establish whether you’re earning enough on the property right now. There’s not necessarily a target number, and cash flow can take a while to accumulate. But if you’re experiencing negative cash flow on a property you’ve owned for more than a decade, there’s probably something wrong. If you’re earning $200 a month, you’ve got a rental property that’s performing well. 

You can go a step further to measure your Cash on Cash returns. Take the net cash flow of the property and divide it by your initial investment. This number will change year by year depending on market strength, rental values, and rental property vacancy. 

Is Your Property Value Appreciating?

Investing in real estate for cash flow is a great idea, but in the Sacramento market you’ll want to invest for appreciation as well. Holding a real estate investment delivers capital appreciation. If the property is appreciating steadily over time but produces limited cash flow, its value in the real estate market is going to earn you high returns when you sell. Evaluate your own appreciation by following the market’s rate of appreciation against what your property is valued at. 

Vacancy Costs Impact Performance

Watch your expenses, especially vacancy. You might be surprised, while you’re evaluating your performance, to find that vacancies are killing the profits you expected. There’s an average economic vacancy rate for residential properties, and you don’t want to be higher than that rate with your own portfolio. If all of your properties are occupied, you’re in good shape and it might even give you the opportunity to raise your rent a bit, since a vacancy wouldn’t hurt as much as it would if you were starting from a point of lower occupancy.