Key Takeaways
Successful landlords rely on benchmarking, using KPIs and comparison methods, to objectively evaluate how a property performs operationally and financially. This reveals hidden inefficiencies, clarifies whether a property is actually profitable, and guides smart decisions.
Effective benchmarking uses three approaches: internal benchmarking, external benchmarking, and strategic benchmarking. Together they help landlords understand competitiveness and areas needing improvement.
Important KPIs help landlords identify strengths, weaknesses, and opportunities across their portfolio, ensuring long-term financial stability.
Those who are successful in property management utilize measurable insights to understand how each property performs operationally and financially compared to expectations and the general market. This process is known as benchmarking, and it provides essential clarity.
Benchmarking is the process that evaluates performance using defined Key Performance Indicators (KPIs). These key performance indicators are quantifiable metrics that reveal risk exposure, profitability, and efficiency.
Successful landlords, property managers, and investors make use of benchmarking. Key performance indicators will highlight areas of improvement, guide your decision-making, and ensure that every investment is aligned with your long-term goals.
In this article, SGI Property Management explores the basics of benchmarking rental properties. Here, we identify the most essential key performance indicators that every successful landlord should track and offer practical strategies for effectively interpreting and using these metrics.
Why you should benchmark your rental property
Benchmarking is a systematic comparison of performance metrics against your historical data, similar properties, or industry standards. Landlords and real estate professionals evaluate the performance of their investment, make informed decisions, and identify inefficiencies using this concept.
Objectively measure performance: A property may appear profitable, but in reality, it is underperforming. Benchmarking provides structure and transparency by giving value to every operational aspect, from tenant turnover and occupancy to rental income and maintenance costs.
Support strategic decision-making: With accurate data, landlords can make evidence-based decisions. Benchmarking ensures that these decisions align with measurable outcomes, whether you are considering property sales, remodeling, refinancing, or adjustment of rental prices.
Promote portfolio management: Landlords, property managers, and investors who own multiple properties can leverage benchmarking for portfolio-wide comparison. This makes it easier to identify which properties offer the highest returns, which ones are struggling with recurring expenses, and which properties require repositioning in the market.
Benchmarking your rental property
Landlords must define reference points and goals before they can measure the key performance indicators. This occurs across three major dimensions, namely:
Internal benchmarking: Here, you compare the current performance of the property against its historical data. For instance, you can analyze tenants’ turnover, maintenance costs, or rental income growth over several years to know if the property is regressing or progressing.
External benchmarking: This involves comparing performance with other properties in the same market or geographic segment. Some important reference sources here are data from property management associations, industry surveys, and local market reports.
Strategic benchmarking: This dimension of benchmarking assesses how top property management companies or investors operate. It is done by studying their cost structures, technology, or systems to know best practices and replicate them.
Each of these dimensions offers unique insights. However, when combined, they provide a comprehensive evaluation of operational effectiveness and competitiveness.
Key performance indicators every landlord should use
When benchmarking rental properties, landlords should select useful metrics that reflect performance. Although every property has unique characteristics, some key performance indicators are universally used across commercial and residential investments.
This measures the annual rental income as a percentage of the property’s current market value or purchase price. It helps landlords assess the income potential compared to the investment size. Higher gross rental yields often mean that there is a stronger short-term cash flow. The downside is that it can accompany lower appreciation potential or higher risk. It is calculated as
Gross rental yield = Annual Rental Income over Property Value x 100
Net rental yield
The net rental yield measures all operational expenses and provides a more accurate picture of profitability. It considers costs such as property management fees, insurance, taxes, and maintenance. This helps to explore how the property efficiently generates income. The formula is
Net Rental Yield = Annual Rental Income over Operating Expenses Property Value x 100
Cash Flow
Cash flow is the money that remains after all operating and financing costs are paid. When it is positive, it means there is adequate liquidity to cover emergencies and ensure long-term financial stability.
A negative cash flow means possible financial strain or inefficiency. Most landlords aim for positive cash flow. However, this depends on the financing structure and investment strategies.
Cash Flow = Gross Rental Income - Operating Expense + Debt Payments
Operating Expense Ratio (OER)
This performance indicator compares gross income with total operating expenses to show the revenue used for day-to-day operations. If the OER is low, there is cost control and efficient management. However, a high OER may signify poor management, inefficiency, or higher maintenance costs. Depending on the type and location, well-managed rental properties should have an OER of between 30% to 50%.
OER = Operating Expenses over Gross Operating Income x 100
Occupancy and Vacancy Rates
Occupancy rate assesses the percentage of units currently rented, while vacancy rate shows the percentage of units that are not occupied. Both have direct impacts on rental income.
Occupancy rate = Occupied Units over Total units x 100
Vacancy rate = 100 - Occupancy rate
Tenant turnover rates
This evaluates the frequency at which tenants vacate or are replaced within a particular period. When it is high, costs associated with lost rent, advertising, and cleaning increase. Any rate below 25% is considered ideal for residential properties. The formula is
Turnover rate = Number of Move-outs in a year over Total Units x 100
Rent collection rate
This assesses the percentage of rents that are collected compared to the ones owed. It evaluates renters' payment behaviors and cash flow reliability. A benchmark of 98% or more is ideal. The formula is
Rent collection rate = Rent collected Total rent due100
This performance indicator measures the general profitability when compared to the total amount invested. It shows the effectiveness of the property in generating returns. The formula is
ROI = Net Profit over Total Investment x 100
Final thoughts
Experienced landlords understand that success in real estate is determined by informed action and disciplined measurements, and not by intuition. Other essential key performance indicators to track include capitalization rate, debt service coverage ratio, return on investment, maintenance cost per unit, rent growth rate, expense growth rate, and portfolio-level KPIs.
SGI Property Management is here to help, contact us today with any questions about KPIs!
