Key Performance Metrics Every Real Estate Investor Should Track
Investing in real estate, including industrial, can be a great way to build your net worth. Yet to truly maximize the value of your investment properties, your portfolio should be run as though it was a standalone business. This requires identifying and tracking key performance metrics.
Key performance indicators, or KPIs, provide an understanding of how well your portfolio is performing. It also helps benchmark your portfolio against your industry peers.
Below are the key KPIs that investors should be collecting data about and evaluating on a consistent basis.
Properties Won vs. Properties Lost Investors should track how many properties they bid on each year, and how successful they are in winning those bids. There are several ways to increase revenue. Adding to your portfolio is one of the most common ways to do so. For instance, if you find yourself bidding on multiple properties each year and not being successful in those efforts, it’s an opportunity to reflect as to why: Are you not being aggressive enough? Are you including too many contingencies as a part of the sale? Maybe you’ve only used one mechanism to source deals.
While you do not want to grow your portfolio haphazardly, if you are in the market for new deals, it’s important to assess your track record in terms of property acquisition. Properties won vs. properties lost is a key KPI that helps inform your business development techniques. Vacancy Rates Every real estate investor should know the vacancy rate of his portfolio at any given time. We’re seeing commercial and industrial vacancy rates hovering around 5 percent here in the Miami-Dade area right now. There’s always some fluctuation, particularly if a major tenant vacates a property. But if you’re struggling to lease your properties, you may need to rethink your marketing strategy. If you’re self-managing your commercial or industrial property, it may be time to consider bringing on a property manager – or, at a minimum, you may decide to hire a leasing broker to boost occupancy rates. That said, monitoring your occupancy rates is only as useful as your ability to compare it with the market average. For instance, you may think an 80 percent occupancy rate is good until you realize that nearby properties are 90 percent or more occupied. Successful investors will always want to be at or better than the market average. Tenant Turnover
Investors should strive to have as little tenant turnover as possible, assuming they’re currently commanding market rents. The minimum lease term for a commercial or industrial space is usually three years, though sophisticated investors tend to strive for lease periods of five or ten years.
If your turnover rates are higher than average, this could be an indication that either a) your selection criteria for tenants needs to be refined; b) the property is being mismanaged; and/or c) the amount you’re charging for rent is not competitive with the broader marketplace. Tenant turnover is a critical KPI for investors to track, especially given that commercial and industrial properties can take longer to re-lease than residential properties. Average Days to Lease Related to the last point above, it’s important to understand how long it takes you to re-lease a property on average. Each day that passes without a tenant occupying the space is money that you are foregoing as an owner.
Now, to be sure, anyone can lease a space in just a few days – all it takes is dropping the price and lowering your selection criteria. This isn’t an optimal strategy. The average days to lease should be compared to the market average, and then should be evaluated against other KPIs (like revenue) to assess how well your portfolio is performing. If it takes you two months longer, on average, to lease an industrial warehouse than the market average, but you’re leasing that space for twice as much as the market average, the wait is worth it. You won’t know that unless you’re closely monitoring your KPIs.
Repair and Maintenance Costs Many real estate investors make the mistake of simply trusting their long-time service providers when given a quote for repairs and maintenance. Instead, real estate investors should shop around every so often. It’s important to understand how much certain repairs and maintenance cost (e.g., what’s the market average for installing a new commercial-grade heating and cooling system?) so you can understand if you’re overpaying. R&M costs can have a major impact on your bottom line. Property Management Fee While management fees can vary for a variety of reasons, typically agreements fall into one of three categories:
1) Percentage of Gross Receipts – Most agreements are set up this way
2) Flat Fee – Primarily used for buildings with a large amount of vacant space
3) Hybrid – A combination, or the greater of, a flat fee or percentage of gross receipt arrangement
A commercial or industrial property owner will generally pay between 2-4 percent of the gross receipts collected on a property. Are your property management costs in line with the Miami-Dade market average? This is a critical KPI to track, as these costs can add up over time.
Revenue Growth Revenue growth is a good way to determine how your real estate portfolio is performing year over year. The other KPIs outlined here can be used to look at that picture in greater detail. For instance, if revenue has declined, you can use these KPIs to discover why that might be the case. Maybe rents haven’t kept pace with inflation. Or maybe you faced a major one-time cost, like building out a new system to monitor your KPIs! In any event, revenue growth is a KPI that should be at the top of a real estate investor’s list of metrics to measure.
One Final Thought
A few years ago someone gave us this valuable advice: you can’t monitor what you can’t measure. Data collection may seem burdensome, but it’s highly important to the success of your real estate portfolio. Collect data, benchmark your performance against both previous years AND your competitors, and then adjust as needed to improve the value of your portfolio.
For more info or for a report of available properties, contact our Industrial Team at 786-433-2380