As we all know, human population is evolving faster than ever in this age, giving rise to a demand for infrastructural development on our planet based on the demographics of different geographical locations on the Earth. Real Estate business comes into play in this scenario.
Real Estate is one of the largest industries which involves large amounts of money as investment in land, labour, capital, and entrepreneurial incentives. Analyses of the key metrics driving the real estate business is essential for effective cost management to get optimal returns. Investments might be real estate construction and/or purchase.
First of all, the market for a residential or commercial real estate property should be studied. This means that the demand factors for a particular type of property must have a positive outlook in a particular geographical location for investment. The market must be delineated based on the specific attributes pertaining to the real estate investment proposal to analyze the performance of the property. It is also essential to compare the subject property performance with that of the other competitive properties in the same location to analyze whether it is under or overperforming based on the key market metrics.
The major key metrics in a real estate construction include
Direct Costs
Indirect Costs
There are different types of residential real estate property, namely, single family individual residences and multifamily apartments or condominiums. Commercial real estate properties are also of different types. They are office, retail, industrial, hotel, healthcare, et al.
The major key metrics in a residential real estate purchase include
The residential property is valued by analyzing it using the above key metrics and comparing it with the other comparable properties based on the same metrics in the same location or market.
Similarly, in a commercial real estate purchase, the following are the key metrics involved.
Income
Expenses
Indirect Expenses
Capital Expenditure
Direct Expenses
The above respective parameters are to be measured and analyzed to arrive at a key metric like, net operating income, to determine the financial feasibility of the real estate investment in question. Based on the net operating income being positive or negative, the decision regarding whether such an investment is to be made or not is taken. The commercial property is valued by capitalizing on the net operating income based on its market demand.
Real estate properties are purchased using loans from banks with some down payment as equity. If such a real estate loan is availed for purchase by the buyer, then the key metric analyzed is the net cash flow after debt payment as equated monthly instalments (EMI). Based on the annual net cash flow being positive or negative, the decision regarding whether the investment in question is to be made or not is taken.
These key metrics might be analyzed at any time during the holding period to assess the property performance or the risk involved in the investment. If the property is already purchased, then based on the above metrics, it is decided whether to hold the property further or to sell it in order to get the optimal return on/of investment.
Author
Srilakshmi K, M.Sc Mathematics
Co-Founder, Iconxt