Real Estate Indicator Benchmarks
The accept/reject benchmark value for each indicator varies from investor to investor, investors adjust the accept/reject benchmark values according to risk tolerance levels and investment goals. This indicators are for investors only. If you are buying your home sweet home they make little sense.
The following table provides a point of reference about typical accept/reject benchmarking settings for each indicator.
From the buyer point of view:
The following table provides a point of reference about typical accept/reject benchmarking settings for each indicator. ( From Wikipedia.org )
| Benchmarking indicator | Example accept criteria | Example reject criteria | Note |
| Gross rent multiplier | Less than 9 | Greater or equal 9 | The lower the better for the investor ( assuming he is buying). Calculates the market value of the property. |
| Cash on cash return | Greater or equal 10% | Less than 10% | The higher the better. Measures the return on cash invested. |
| Profitability index | Greater or equal 1.0 | Less than 1.0 | The higher the better. : Measures the financial efficiency and desirability of the investment property. |
| Internal rate of return | Greater or equal 8% | Less than 8% | The higher the better. It shows the total percentage return on an investment. |
| Debt coverage ratio | Greater or equal 1.2 | Less than 1.2 | The higher the better. Finds out whether the property generates enough money to cover the debtBreak even ratioLess than or equal 85%Greater than 85%The lower the better: Estimates how vulnerable a property is to defaulting on its debt should rental income decline. |
| Loan to value ratio | Less than or equal 70% | Greater than 70% | The lower the better. Calculates the ratio between the loan balance and the market value of a property expressed as a percentage. |
| CAP rate / Capitalization rate | Greater or equal 7% | Less than 7% | The higher the better. Measures the earning ability of an income-producing property. Cap Rate = Income / Value |
| Yield | Greater or equal 7% | Less than 7% | Like Cap Rate but Yield = income / Total cost |
| Net cash flow | Greater or equal 10% | Less than 10% | The higher the better. Calculates the net cash flow of the property after expenses and taxes. |
There is no magic accept/reject criteria for the benchmarking indicators, each investor needs to make the determination on which criteria is appropriate for each particular situation. Also the accept / reject criteria are influenced from other variables like Interest Rate, Inflation rate, volatility or risk associated with the investment etc.
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Paolo
I am a realtor and investor in the DC area