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
Generic name given for any association of property owners sharing an interest in commonly owned property. Community associations may be developed in condominium, cooperative, or housing ...
The land-to-building ratio is a means to calculate in percentage how much a structure occupies the total land parcel on which it is located. It is the total building area as a percentage of ...
Individual who gives false statements under oath, which is a criminal act punishable by imprisonment and fine. An example is signing a tax return that fraudently understates rental income, ...
Loan such as a mortgage that the borrower has consistently made payments on when due over many years. The borrower has proven his creditor worthiness. ...
Owned by one individual or sole ownership. ...
Affordability is a term used to describe the ability of a person or entity to pay in relation to the income earned by them. Affordability is the comparison of a person's income against ...
The word’s etymology reflects several diverse or seemingly unrelated topics under the same umbrella. As part of everyday discourse, you’ll find the term “omnibus” ...
To understand the definition of the term demised premises, one must understand what demise means. Because demised premises is a widespread use for the term demise. The demised premises ...
Amount the taxpayer gets back when he or she files the tax return at the end of the reporting year because taxes were overpaid for that year. The tax overpayment equals the tax payments ...
Have a question or comment?
We're here to help.