Benchmark
Definition of "Benchmark"
Typically, a benchmark means a standard comparison unit between similar items to measure their performance. As such, we must select the universal component or criterion. Then, grade the comparable item below, equal, or above the given unit. Therefore, benchmarking refers to making meaningful analogies or juxtapositions to other things while keeping opportunities for improvement in mind.
Often, the process of benchmarking is subjective. The person in charge has to decide what the relevant universal unit (regularly what the best in class is) and the elements of the peer group should be. Once you identify the inferior elements in comparison, you can upgrade them.
You can apply this practice to various domains, such as product and real estate benchmarking.
Benchmarking in real estate
If you wish to determine the financial features of an investment property, you should resort to real estate benchmarks. In real estate, the definition of benchmarking means the comparison of investment properties and key performance indicators against a fixed scheme of measurement.
These indicators enable investors to eliminate personal feelings, emotions, opinions, and speculations from the decision-making process. For instance, a benchmark price in real estate defines a typical property’s worth in a given neighborhood. The same rule applies to financial benchmarking too.
Examples of real estate benchmarking indicators
Although there are many property financial indicators, only the essential benchmarks provide truthful information about your future investment. As a real estate investor, first, you should analyze and then approve of or dismiss these benchmark values. At the same time, you must consider how much risk you’re willing to assume and your overall investment objectives. Let’s see these indicators!
Expense and return benchmark with profitability index
The profitability index signals the relationship between your expenses and return. Essentially, you consider the present value of your expected income in cash and the money you invest in purchasing the house. The ratio between these two makes up for the profitability index. Besides, the higher it goes, the more attractive financial income you’ll enjoy.
Calculate your rental revenue with the gross rent multiplier
The gross rent multiplier is a significant benchmarking indicator. It defines real estate market value by calculating the percentage of a property’s selling price to its gross rental revenue. Note that the lower this benchmark is, the worthier the investment will prove.
Cash-on-cash return benchmark
The benchmark of cash-on-cash return adds up the cash earnings on your cash investments in a real estate transaction. In other words, it calculates, on a pre-tax basis, your annual profit on the property compared to the mortgage you paid during the same year.
Let’s suppose you decide to sell your house after a year. Then, you need to calculate the sum of all expenses you paid for your property, loans, closing fees, etc. If you manage to sell the house at a higher price and deduce all your payments, you can end up with a high cash-on-cash return.
Consider other essential real estate benchmarks!
The internal rate of return calculates how much financial interest and efficiency a specific property as an investment opportunity stirs around it.
Discover whether your future home will generate enough revenue so you’ll be able to pay for expenses with a debt coverage ratio!
Evaluate how fragile your investment can become to failing to pay off its debts with a cash break-even ratio if your rental revenue drops.
Estimate the ratio between the sum of money you have to give back on your loan to the bank and your home’s market value in the loan-to-value ratio benchmark!
Calculate how much revenue your investment can generate with the so-called capitalization rate!
Using the net cash flow benchmark, you can appraise how much net cash you obtain after various payments.
Contact local real estate agents before you invest in a property! They will inform you about relevant real estate benchmarks.
Popular Real Estate Terms
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A tenancy in which no written lease is involved, rent being paid monthly. It can be renewed for each succeeding month or terminated at the option of either party with sufficient notice. ...
To approximate the worth or valuation of property To give an appraisal value estimate of property. Property value appraisals are never exact, and are at best approximations of actual ...
A lessee (tenant) subleases the apartment to a third party .The tenant is now sandwiched between the lessor and the sublessee. In other words, the tenant is acting as a lessee to the ...
Investigation into the causes of death. A post mortem is normally performed by a public coroner. It might be performed to determine the cause of death of an apartment house tenant. ...
Combination of insurance policies on property with each providing an additional increment of coverage exceeding the limits of the preceding policy. For example, policy A adds $70,000, then ...
Another residence in addition to the main residence where a person or family resides. An example is a second home out of the city used on weekends and during vacations. Interest and real ...
A capitalization method which divides a properties first year net operating income by an estimated general capitalization rate to develop a total property estimate. ...
The definition of population density is a way to measure the number of populations in a specific area. The method of calculating population density is by the number of people per square ...
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