Real Estate KPIs: Commercial vs Residential

If you are in commercial or residential real estate as an operator or investor, these terms should be well understood. Some of the terms below are repeated between commercial and residential. However, they will have different calculation terms that are more common for the type of property.

You can plug your own data into an Excel template and run various scenarios, check out these real estate models to do so.

General KPIs and Metric Calculations (commercial)

1. Net Operating Income (NOI)

Definition: The annual income generated by a property after all operating expenses are deducted, but before debt service and taxes.
Calculation:

$$\text{NOI}=\text{Gross Operating Income}-\text{Operating Expenses}$$

• Gross Operating Income typically includes rent and any ancillary income (parking fees, laundry, signage, etc.).

• Operating Expenses include property taxes, insurance, utilities (for common areas), repairs & maintenance, and management fees. Does not include things like tenant improvements, leasing commissions, or most general 'leas-up costs'.

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2. Capitalization Rate (Cap Rate)

Definition: The rate of return on a real estate investment based on its NOI relative to the property’s value or purchase price. It’s often used to compare properties’ potential returns.
Calculation:

$$\text{Cap Rate}=\frac{\text{NOI}}{\text{Property Value}}$$

• A higher cap rate usually implies higher risk or lower price relative to income, while a lower cap rate suggests lower risk or higher price relative to income.

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3. Cash-on-Cash Return

Definition: Measures the annual return on the cash (equity) invested, specifically focusing on the investor’s actual out-of-pocket cash flow.
Calculation:

$$\text{Cash-on-Cash Return}=\frac{\text{Annual Pre-Tax Cash Flow}}{\text{Total Cash Invested}}$$

• Annual Pre-Tax Cash Flow is typically the NOI minus debt service (annual mortgage payments).

• Useful for tracking how effectively a property is generating immediate distributable cash based on the initial equity investment.

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4. Internal Rate of Return (IRR)

Definition: The discount rate at which the net present value (NPV) of all future cash flows (including the proceeds from an eventual sale) equals zero. It represents the overall return on invested capital over the entire holding period.
Calculation:

• IRR is found by solving the equation $\text{NPV} = 0$, summing all discounted cash flows and the final sale proceeds.

• Typically calculated using a financial calculator or spreadsheet functions (e.g., =IRR() in Excel).

IRR incorporates both time value of money and the property’s eventual sale; it is very useful for comparing real estate investments of different durations.

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5. Equity Multiple

Definition: Shows how many times an investor’s equity is returned over the life of the investment.
Calculation:

$$\text{Equity Multiple}=\frac{\sum (\text{All Distributions to Equity})}{\text{Total Equity Invested}}$$

• For example, an equity multiple of 2.0x means the investor receives total cash flows (operating distributions + sale proceeds) that are twice the initial equity investment.

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6. Loan-to-Value (LTV) Ratio

Definition: The ratio of the loan amount to the property’s value, used to understand the property’s leverage.
Calculation:

$$\text{LTV}=\frac{\text{Loan Amount}}{\text{Appraised Property Value}}$$

• A lower LTV typically indicates lower risk from a lender’s perspective; a higher LTV means the property is more heavily leveraged.

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7. Debt Service Coverage Ratio (DSCR)

Definition: A measure of a property’s ability to cover its debt obligations from its NOI.
Calculation:

$$\text{DSCR}=\frac{\text{NOI}}{\text{Annual Debt Service}}$$

• Annual Debt Service is the sum of all principal and interest payments for the year.

• A DSCR of 1.2 means NOI is 20% higher than the debt service, indicating a comfortable margin to cover loan payments.

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8. Operating Expense Ratio (OER)

Definition: Shows the proportion of effective gross income spent on operating expenses.
Calculation:

$$\text{OER}=\frac{\text{Operating Expenses}}{\text{Effective Gross Income}}$$

• Effective Gross Income is gross scheduled income minus any vacancy and credit losses, plus additional income sources (e.g., fees, services).

• This metric helps identify if operating expenses are proportionate or excessive.

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9. Occupancy Rate

Definition: The percentage of total rentable space (or units) that is currently leased or occupied.
Calculation:

$$\text{Occupancy Rate}=\frac{\text{Occupied Space (sq.ft. or units)}}{\text{Total Rentable Space (sq.ft. or units)}}\times 100\mathrm{\%}$$

• Essential for understanding income stability and the property’s market competitiveness.

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10. Return on Investment (ROI)

Definition: A simple percentage measure of the total net gain or loss on an investment relative to the cost of the investment.
Calculation:

$$\text{ROI}=\frac{\text{Total Gain from Investment}-\text{Initial Cost of Investment}}{\text{Initial Cost of Investment}}\times 100\mathrm{\%}$$

• While ROI is straightforward, it doesn’t account for the time value of money.

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11. Return on Equity (ROE)

Definition: Measures the annual return based on the current equity in the property, rather than the original investment.
Calculation:

$$\text{ROE}=\frac{\text{Annual Cash Flow}}{\text{Total Equity (Market Value - Debt)}}\times 100\mathrm{\%}$$

• As property value and equity grow (or shrink), ROE can reflect whether it’s efficient to hold or refinance the property.

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12. Gross Rent Multiplier (GRM)

Definition: A valuation metric comparing a property’s price to its gross rental income.
Calculation:

$$\text{GRM}=\frac{\text{Property Price}}{\text{Gross Scheduled Rent}}$$

• A lower GRM indicates the property’s price is lower relative to its gross rent, but it doesn’t factor in operating expenses or vacancies.

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13. Payback Period

Definition: The amount of time required to recoup the initial investment from cash flow alone.
Calculation:

• Add each period’s cash flow until the total equals the initial investment. The time at which this occurs is the payback period.

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14. Weighted Average Lease Expiry (WALE)

Definition: Average time (usually in years) until all leases in a property (or portfolio) expire, weighted by each tenant’s proportion of total rental income or total space.
Calculation (by rental income):

$$\text{WALE}=\sum (\frac{\text{Tenant’s Annual Rental Income}}{\text{Total Annual Rental Income}}\times \text{Lease Term Remaining})$$

• Useful for understanding lease rollover risk and stability of rental income.

General KPIs and Metric Calculations (residential)

1. Occupancy Rate

Definition: The percentage of total units (or beds, in student housing) that are currently occupied and generating rent.
Calculation:

$$\text{Occupancy Rate}=\frac{\text{Number of Occupied Units}}{\text{Total Number of Units}}\times 100\mathrm{\%}$$

• Why It Matters: A high occupancy rate typically indicates strong demand and stable income. However, in some cases, a lower rate could be acceptable if rents are significantly above market or there is a strategic unit turnover.

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2. Economic Occupancy Rate

Definition: Measures the percentage of the property’s potential rental income that is actually collected, factoring in concessions, bad debt, and vacancies.
Calculation:

$$\text{Economic Occupancy Rate}=\frac{\text{Actual Collected Rent}}{\text{Gross Potential Rent}}\times 100\mathrm{\%}$$

• Why It Matters: A property might have a high physical occupancy but lose income due to concessions, delinquent payments, or below-market rents.

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3. Vacancy Rate

Definition: The percentage of total units that are unoccupied or not generating rental income.
Calculation:

$$\text{Vacancy Rate}=\frac{\text{Number of Vacant Units}}{\text{Total Number of Units}}\times 100\mathrm{\%}$$

• Why It Matters: Directly impacts revenue. Helps owners track how quickly they need to lease units to maintain desired income levels.

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4. Tenant Turnover Rate

Definition: The percentage of tenants who do not renew their leases and move out each year.
Calculation:

$$\text{Tenant Turnover Rate}=\frac{\text{Number of Move-Outs in a Period}}{\text{Number of Units}}\times 100\mathrm{\%}$$

• Why It Matters: High turnover leads to increased costs for marketing, unit renovations, and lost rent. Lowering turnover can improve NOI.

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5. Lease Renewal Rate

Definition: The percentage of tenants who choose to renew their leases at the end of the lease term.
Calculation:

$$\text{Lease Renewal Rate}=\frac{\text{Number of Renewing Tenants}}{\text{Number of Expiring Leases}}\times 100\mathrm{\%}$$

• Why It Matters: A good renewal rate indicates tenant satisfaction and reduces leasing and turnover costs.

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6. Delinquency Rate

Definition: The percentage of rent that is late or uncollected within a given period.
Calculation:

$$\text{Delinquency Rate}=\frac{\text{Total Unpaid Rent}}{\text{Total Rent Billed}}\times 100\mathrm{\%}$$

• Why It Matters: Measures the effectiveness of rent collection policies and market viability. Chronic delinquencies can severely impact cash flow.

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7. Rent Growth (or Effective Rent Growth)

Definition: The rate at which the average rent per unit (or per square foot) increases over time.
Calculation (simple):

$$\text{Rent Growth}=\frac{\text{Avg. Rent This Year}-\text{Avg. Rent Last Year}}{\text{Avg. Rent Last Year}}\times 100\mathrm{\%}$$

• Why It Matters: Indicates how quickly you can raise rents. Positive rent growth can significantly increase a property’s value (especially via NOI).

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8. Net Operating Income (NOI)

Definition: The income generated by the property after deducting operating expenses but before debt service and taxes.
Calculation:

$$\text{NOI}=\text{Gross Operating Income}-\text{Operating Expenses}$$

• Why It Matters: NOI is central to valuation (via the Cap Rate) and measures the property’s core profitability.

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9. Operating Expense Ratio (OER)

Definition: The percentage of effective gross income consumed by operating expenses.
Calculation:

$$\text{OER}=\frac{\text{Operating Expenses}}{\text{Effective Gross Income}}\times 100\mathrm{\%}$$

• Why It Matters: Reveals how efficiently a property is managed. A high ratio may indicate overspending or inefficiencies.

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10. Debt Service Coverage Ratio (DSCR)

Definition: The ratio of NOI to annual debt payments, showing how comfortably a property can cover its debt obligations.
Calculation:

$$\text{DSCR}=\frac{\text{NOI}}{\text{Annual Debt Service}}$$

• Why It Matters: Lenders use DSCR to assess loan risk. A ratio above 1.2 is often considered healthy in multi-family.

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11. Cash-on-Cash Return

Definition: The annual return on the actual cash invested, measuring distributable cash relative to initial equity.
Calculation:

$$\text{Cash-on-Cash Return}=\frac{\text{Annual Pre-Tax Cash Flow}}{\text{Total Equity Invested}}$$

• Why It Matters: Shows how much cash flow an investor is getting back each year compared to the original out-of-pocket investment.

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12. Capitalization Rate (Cap Rate)

Definition: The ratio of NOI to the property’s purchase price or current market value.
Calculation:

$$\text{Cap Rate}=\frac{\text{NOI}}{\text{Property Value}}$$

• Why It Matters: A key measure for comparing valuation across multi-family properties. Lower cap rates typically imply higher prices (or lower returns) and vice versa.

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13. Internal Rate of Return (IRR)

Definition: The discount rate at which the net present value (NPV) of all future cash flows and eventual sale proceeds equals zero.
Calculation:

• Found by solving for the rate $r$ in the NPV equation where $\text{NPV} = 0$. Often calculated via spreadsheet/software.

• Why It Matters: Incorporates the time value of money and captures both cash flow and sale proceeds over the entire hold period.

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14. Equity Multiple

Definition: Shows how much total cash flow (operating + sale proceeds) is returned to investors as a multiple of their initial equity.
Calculation:

$$\text{Equity Multiple}=\frac{\text{All Distributions to Equity}}{\text{Total Equity Invested}}$$

• Why It Matters: Simple snapshot of total cash returned over the life of the investment. For example, an equity multiple of 2.0 means you received double your initial equity.

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15. Break-Even Occupancy Rate

Definition: The occupancy level at which the rental income just covers all operating expenses and debt service.
Calculation (conceptual):

$$\text{Break-Even Occupancy}=\frac{\text{Total of Operating Expenses + Debt Service}}{\text{Gross Potential Rent}}$$

• Why It Matters: Helps to understand how low occupancy can drop before the property fails to cover its costs.

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16. Concession Rate

Definition: The percentage of rent or number of units where the landlord is offering discounts or incentives (e.g., one month free).
Calculation:

$$\text{Concession Rate}=\frac{\text{Number of Units with Concessions}}{\text{Total Number of Leased Units}}\times 100\mathrm{\%}$$

• Why It Matters: High concession rates may indicate a soft market or a need to boost occupancy quickly, which can erode effective rents.

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17. Maintenance Cost per Unit

Definition: Total property maintenance costs divided by the number of occupied units (or total units).
Calculation:

$$\text{Maintenance Cost per Unit}=\frac{\text{Total Maintenance Costs}}{\text{Number of Units}}$$

• Why It Matters: Tracking this cost helps gauge operational efficiency and anticipate capital needs or improvements.

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18. Turnover Cost per Unit

Definition: The average cost associated with turning over a unit when one tenant moves out and another moves in (repairs, cleaning, marketing, etc.).
Calculation:

$$\text{Turnover Cost per Unit}=\frac{\text{Total Turnover Costs in a Period}}{\text{Number of Turnovers in the Same Period}}$$

• Why It Matters: Since tenant turnover directly impacts profits, understanding and controlling these costs is crucial.

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19. Days on Market / Time to Lease

Definition: The average number of days a unit remains vacant before leasing to a new tenant.
Calculation:

• Sum the total days vacant for all turned units within a period, then divide by the number of turned units.

• Why It Matters: Shorter times to lease indicate strong demand and effective marketing/operations.

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20. Net Effective Rent

Definition: The average rent received from a unit after factoring in concessions and discounts over the lease term.
Calculation (conceptual):

$$\text{Net Effective Rent}=\frac{\text{(Monthly Rent}\times \text{Lease Term in Months})-\text{Total Concessions}}{\text{Lease Term in Months}}$$

• Why It Matters: Provides a more accurate picture of actual rental income per unit than headline (or “street”) rent.

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