Real estate accurate and reliable valuations aren’t easy to find. Therefore, determining the extent to which a property investment proved to be profitable is not an easy task. There are many metrics that an investor has to keep track of so that they can understand the present situation that their investments are in and take efficient decisions based on that. This article gives a brief outline of how to measure performance within the real estate market.

Why Performance Measurement is Difficult ?

The valuation of liquid assets like bonds and stocks is simple. It is because they come with an exact listed price. The price is listed in exchange every couple of seconds, and any person can trade at the price quoted. But this isn’t the case for real property! The prices of real estate are not clear, and it requires a significant amount of effort and time to discover both the capital and rental value of real property. The true value of a particular property can only be realized when it becomes part of a deal.

Since each property is distinct (i.e. not homogeneous) therefore, there is no way to establish any standard price on the market that applies to every investment unit. Therefore, real estate investors need to examine a range of methods to figure out whether their investment is growing! Here are a few of the usual methods that investors use in order to determine the performance or failure of their investment.

• Indices: Real estate indices are an essentially reliable method to gauge the amount of expansion that has been coming to investors. The indices of real estate use the value of property in one year to be 100. When prices rise and fall, it is possible that the price of an index gets changing dynamically. The indices are a reflection of the property prices of various areas, and the index records the changes across all neighborhoods to a certain extent. Because this index was created by companies who specialize in these kinds of transactions, the data that is provided is precise and reliable. Indexes are among the most cost efficient methods for investors to make calculations back of the envelope about the increase or decrease in value of their investments.
• Valuation: Another option for investors to determine the worth of their property is to get an appraisal by a professional. In the majority of countries of the world, there are professional appraisers who assess the value of any property precisely and then provide a report to the owner at a cost. There is a cost associated with this service. But, if professional investors obtain valuation for multiple properties, they are able to get the best price due to economics of scale. Businesses like Real Estate Investment Trusts (REITs) and financial institutions usually use a certificate issued by appraisers like these to prove they have increased.
• Comparable Properties: Not the last, the most popular method of determining the value of a particular property is to consider the comparable value of similar properties. This method is simple to implement and is free. However, the outcomes from this method aren’t quite precise. This is due to the fact that the costs of houses within the same neighborhood could vary quite a bit. The amenities that are available at a specific house and the proximity of other amenities can affect the cost. The individual adjustments should be made to each property. Therefore, the values calculated from this appraisal are incorrect and can’t be used for any purpose other than official.

Measures to Look At

If the investor doesn’t intend to sell the property, instead, but to hold it for a while, an investor may take a look at these strategies to better understand the performance of his investment more thoroughly.

• Equity Growth resulting from appreciation: The principal reason investors invest their money into real estate is the capital appreciation. The most significant factor that these investors are most interested in is the increase in equity, which they have gotten by keeping their home.Therefore, they keep a record of their mortgage payment, which includes interest and principal payments. They then look at the market prices to determine if the equity they’ve constructed in their home is greater than the costs that they’ve had to pay because of keeping the property.
• The Growth of Equity from Cash Flows Certain investors purchase properties not for capital appreciation instead, they purchase the property to generate cash flow. They deduct their monthly interest cost in their monthly cash flows. The remaining amount helps to increase their equity. Thus, when the cash flow is recurring every month and over time, there is a significant growth. Most of the time, rent increases guarantee that the property generates a significant increase in cash flows over the course of time.
• Operating Ratio Investment in property is a long-term investment. Over the course of time, each of the cash flow generated and the operational expenses associated with keeping the property will fluctuate. This is the reason that many investors are aware of the proportion of these two figures to assess the success of their investments.