Good news for St. Louis real estate investors – this market is one of the most desirable regions for buyers interested in rental real estate. That’s due to our low cost of entry and our diversity in properties.
The investors we work with use different equations to determine the profitability of a property. Typically, we see people using:
- Capitalization Rate
- Gross Rent Multiplier
- Net Operating Income
- Cash on Cash
There are even more ways to determine whether a property is a good investment. Working with an experienced agent and property manager who understands the rental market can help you determine which metrics to look at when you’re evaluating a potential investment. How you measure success will depend on your financing and your unique investment goals.
How to Use Real Estate Metrics with St. Louis Rental Properties
If you’re still not sure how to evaluate those potential acquisitions, take a look at the metrics we typically use at Deca Property Management.
Net Operating Income is established by subtracting your expenses from your revenue. This is simple math and a good starting point. It doesn’t take into consideration your mortgage debt or any improvements you’ll have to make to the property before renting it out.
The Capitalization Rate or Cap Rate requires you to divide your Net Operating Income (NOI) by the total price you’re paying for the home. This can be used on all different property types, and smart investors have a specific number in mind before they buy. The only thing to watch for here is that usually you have to rely on the seller’s numbers. Do what you can to gather your own data on what you’ll earn on a potential rental property.
The Gross Rent Multiplier requires you to take the property price and divide it by the gross annual rent you anticipate earning. This can be useful when you’re measuring one potential investment against another. You’ll know which is most likely to earn you more.
Finally, the Cash on Cash metric asks you to divide your cash flow by the cash you paid in the real estate deal. It’s an important part of identifying how much return you’re earning on your investment. Most investors want to earn more cash with real estate than they do with their other investments.
Vacancy and Retention Numbers Impact Profitability
Take a look at vacancy rates and tenant placement. When we’re looking at pro formas, the first thing we check is when the tenants were placed. This can help us establish whether the vacancy estimate is accurate and it can also tell us if the rental value is where it should be. A tenant who has been in place for 10 years is likely paying less than the market demands. There’s also likely to be high turnover costs if that tenant moves out. A four-unit duplex with brand new tenants who were placed a month ago is a bit of a risk vacancy-wise.
St. Louis is an excellent rental market for investors. This is a mid-level city with nine Fortune 500 companies in the metro area. There’s been a strong surge of new multifamily construction, and an additional 2,649 units showed up on the market in 2019. Another 3,000 are planned for this year.
Recently, we’ve also seen some areas go through what some are calling “The Single Family Conversion Machine.” This describes investors converting a duplex property into a large single-family home. Or, a four-unit building can be converted into two townhomes. This investment strategy has decreased the density of the market and displaced many renters, who must now find new homes.
There are a lot of options for investors in St. Louis, and we’d love to talk more about your potential for a profitable rental property. Contact our team at Deca Property Management.