If you’ve built even a modest commercial real estate investment portfolio, you’ve likely employed an asset manager to optimize your properties. But how do asset managers ensure that their efforts are hitting the mark? Often, they use Key Performance Indicators (KPIs), quantifiable metrics popularized by Google as part of their Objectives and Key Results (OKR) system of business planning. Asset managers can utilize KPIs to provide a data-supported portrait of an investment property’s financial fitness, efficiency, and potential. But investors should also have a firm understanding of the KPIs their asset managers are using to steer the course of their investments. Today, we’ll take a look at six of the most common KPIs used by your asset manager.
Net Operating Income (NOI)
NOI offers a window into a property’s profitability. If you hear your asset manager mention that the NOI is growing, it means that the property has improved its operational performance. It could have done so through a variety of methods, including:
- Expense conservation
- Occupancy increases
- Rent increases
NOI is frequently used in property valuation efforts and as a metric for guiding financing decisions. If you’d like to calculate your property’s NOI for yourself, simply subtract operating expenses from the gross rental income. Note that capital expenditures and debt service should not factor into your calculations.
Cash-on-Cash Return
Cash-on-cash return is perhaps one of the most exciting KPIs for an investor and an asset manager alike. Why? Because it clarifies the amount of money you’re actually earning on your investment. Traditionally, cash-on-cash return is presented in annual increments.
Internal Rate of Return (IRR)
When your asset manager wants to weigh your opportunities for long-term investment, they’ll likely employ IRR. This KPI estimates the cumulative return over an investment’s lifespan, making it ideal for commercial investments with a long road ahead of them. When calculating IRR, asset managers account for both income and capital gains.
Occupancy and Lease Expiration Dates
Occupancy and lease expiration dates are twin metrics with a shared objective: to give you a heads up about potential financial turbulence. By assessing the percentage of your commercial property that is actively leased, along with a gauge of upcoming lease expirations, your asset manager can start planning for rough patches by increasing marketing or striving to stagger lease expirations.
Debt Service Coverage Ratio (DSCR)
Risk assessment finds one of its strongest KPIs in DSCR, an indicator of whether an investment property is robust enough to stay the course amidst economic turbulence. Favored by asset managers and lenders alike, DSCR compares NOI with debt payments. If the resulting DSCR is above 1.0, it means the property is producing enough income to accommodate its loan.
Capital Expenditures (CapEx) Forecasting
We discussed capital expenditures (CapEx) recently, but for those unfamiliar with the term, it basically encapsulates all of the physical renovations and improvements you perform on an investment property. There are numerous reasons why your asset manager would want to keep tabs on CapEx, chief among them:
- Increases in property value
- Reinforce longevity
- Support for rent increases
Using KPIs for Confidence in Investment
If you’ve mistaken your asset manager for a glorified property manager, perhaps knowing more about these KPIs will reframe them as the insightful financial strategist they are. KPIs allow these professionals to map a course forward to financial fruition. With a keen understanding, you can discuss these KPIs with your asset management team and make future commercial investments with unwavering confidence.
