During the year, we run detailed portfolio reviews for our clients, and I use the Christmas / New Year vortex week as performance review time for my portfolio, and the end of the financial year to set our personal goals.
While you may not want to go into the 60+ point detail that we undertake, outlined below are the top 10 performance indicators you can use to assess your property's performance over the past year.
If you can cover the mortgage principal, interest, taxes and insurance with the monthly rent, you are in good shape as a landlord. Just make sure you have cash reserves in hand to cover that payment in case you have a vacancy or need to cover unexpected maintenance costs. If you know a particular property has negative cash flow, hopefully you can mitigate this with depreciation and tax rebates, or other properties in your portfolio can cover the loss.
Whether your property is covering costs or not, if you perform this calculation you will at least be clear on what needs to happen to balance your portfolio returns.
Gross rental yield = (Annual rental income / Property value) x 100
Net rental yield = [(Annual rental income – Annual expenses) / Total property cost] x 100
Loan to value = Loan amount divided by value of the property. For example = $320,000 divided by $400,000, to results in an LVR of 80%.
Break-even Ratio = [Operating Expenses + Debt Service] / Gross Operating Income
For example, if our property has a combined total of $47,145 for operating expenses and debt service (interest payments) along with a gross income (rental return) of $57,000 the BER is 82.71%. In other words, money going out to run the property consumes 82.71% of the money coming in.
Debt Coverage Ratio = Net Income / Debt Service (interest payments)
For example, if our property has an annual debt of $21,645 along with a net income of $31,500 the result is a DCR of 1.46 (rounded). In other words, the income is 146% greater than the mortgage payment and therefore will cover the debt with money left over.
There are a number of free calculators online that can do the calculation for you, but it isn't too difficult to work out manually. The first step in the calculation of the average annual capital growth rate is to determine the market value at the start and end of the intended investment period. Next, subtract the difference, and then divide this amount into the 'starting price'.
For example : Property one – purchased for $500,000 in December 2015, increased to $600,000 in December 2016. This represents an increase of $100,000. Divide $100,000 into $500,000 resulting in a capital growth percentage of 20%.
Ideally, set up auto calculations in your spreadsheet so you can easily calculate the ratios for each property you own. This should include your home as well. There are many more ratios and equations you can use to monitor performance, so if you have any favourites be sure to add them to your list.
Okay . . .so you might need some of that Christmas chocolate or Winter wine to get through the initial process, but after you have completed the review you will have the clarity you need to make quality decisions about the properties you have, and what types of property you need to buy next to balance out your portfolio.
Debra Beck-Mewing is the Founder and CEO of The Property Frontline. She has more than 20 years' experience in property investing, Australia-wide and has used a range of strategies to build her property portfolio including renovating, granny flats, sub-division and development. Debra is skilled in identifying development opportunities, and sourcing properties that have multiple uses and multiple exit strategies. She is a Qualified Property Investment Advisor, licensed real estate agent and also holds a Bachelor of Commerce and Master of Business. As a passionate advocate for increasing transparency in the property and wealth industries, Debra is a popular speaker on these topics. She is also an author, podcast host, Editor in Chief of Property Portfolio Magazine and participates on numerous committees including the Property Owners' Association.
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Disclaimer – This information is of a general nature only and does not constitute professional advice. We strongly recommend you seek your own professional advice in relation to your particular circumstances.