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Real Estate Risk Management and Metrics
By Juan Cabrera, MBA realbench.net
Investing in real estate investment properties involves more than acquiring a bricks and mortar structure, it is about buying an income stream, therefore the financial characteristics of the real estate investment property is the most important aspect of the deal.
Real estate property metrics is the standard of measurement used to analyze the financial characteristics of a real estate investment property. Investing in real estate without measuring its financial characteristics is no different than gambling. True investing is only realized once the investor has a framework of measurement by which he or she will benchmark potential real estate property investments against. Only then risk is contained and profits realized.
A number of factors have recently converged to heighten restrains on real estate property investment financial flows as well as on credit availability, thus forcing real estate property investing to be more precise and eliminating novice speculation from the market. Real estate property metrics is what differentiates precise real estate property investing from speculation. The recent contractions in economic activities do not measurably impact the real estate property investor who runs the numbers and gathers metrics for each potential real estate property investment; such investors substantiate their investment decisions based on the metrics of the real estate property investment property rather than speculation on prices or personal emotions.
Financial indicators and their benchmarks are the foundation of real estate property investment metrics. Indicators in general allow investors remove emotions and speculation out of investing; this is true not just in real estate property investing, but on any other investment types such as stock or currency trading. Indicators are particularly important in real estate property investment since it deals with a physical entity- a bricks and mortar structure, which might trigger emotions on the investor based on its architecture and beauty. By feeling visually and emotionally excited about the potential real estate investment property the investor can make the wrong financial decision. Real estate property investment indicators allow the investor stay focus on what�s important on a real estate property investment deal- the numbers. How beautiful or ugly the physical real estate property is does not matter, only the financial numbers matter; if the financial numbers are solid then the real estate investment property is beautiful for your pocket, regardless of its physical appearance.
There are many real estate property investment financial indicators, however the ones that provide the most value (especially for income producing real estate property investments) are: The Gross Rent Multiplier, Cash on Cash Return, Profitability Index, Internal Rate of Return, Debt Coverage Ratio, Break Even Ratio, Loan to Value Ratio, Capitalization Rate, and Net Cash Flow.
The remarkable technological advances of recent years have doubtless augmented and fostered the preciseness of real estate investment financial indicator calculations. Real estate software such as RealBench allow the automatic calculation of real estate investment indicators, thus allowing investors run the metrics on real estate investment properties in a matter of minutes and compare them against other real estate investment properties. It is no longer required for an investor to have an MBA or an advance degree in financing to accurately calculate an real estate investment property financial indicators. Let the software do the work so that you can concentrate on what you do best- making money.