Investing in real estate can be highly profitable, but only if you analyze the investment correctly. Whether you’re buying a rental property, flipping a house, or investing in commercial real estate, understanding the financial metrics is crucial for making an informed decision.

This guide will walk you through the key financial metrics and tools used to analyze real estate investments in the Philippines.

1. Return on Investment (ROI)

Return on Investment (ROI) measures how much profit you earn relative to the cost of the investment. A high ROI indicates a profitable investment.

Formula:

ROI (%) = (Net Profit / Total Investment Cost) x 100

Example: If you bought a condo for PHP 5M and earned PHP 500K after expenses, your ROI is 10%.

2. Cash Flow Analysis

Cash flow refers to the net income from a rental property after deducting expenses such as mortgage payments, maintenance, and property taxes.

Formula:

Cash Flow = Rental Income - Expenses

If your rental property earns PHP 30,000 per month but expenses total PHP 20,000, your cash flow is PHP 10,000.

Learn more about maximizing rental income.

3. Capitalization Rate (Cap Rate)

Cap Rate measures the potential return of an income-generating property.

Formula:

Cap Rate (%) = (Net Operating Income / Property Value) x 100

A cap rate of 5-8% is considered good for rental properties in the Philippines.

4. Gross Rental Yield

Gross Rental Yield helps investors determine the annual return based on rental income.

Formula:

Gross Rental Yield (%) = (Annual Rent / Property Price) x 100

Example: If your condo costs PHP 5M and generates PHP 360K annually in rent, your gross rental yield is 7.2%.

5. Net Operating Income (NOI)

NOI is the total income generated from a property after operating expenses but before taxes and loan payments.

Formula:

NOI = Total Rental Income - Operating Expenses

6. Loan-to-Value Ratio (LTV)

LTV is used by banks to assess the risk of a mortgage loan.

Formula:

LTV (%) = (Loan Amount / Property Value) x 100

Banks in the Philippines typically offer LTV ratios of 70-80%.

7. Price-to-Rent Ratio

This ratio helps investors decide whether to rent or buy a property.

Formula:

Price-to-Rent Ratio = Property Price / Annual Rent

If the ratio is below 15, buying is usually better; if above 20, renting may be the better option.

8. Tools for Real Estate Investment Analysis

Several online tools can help analyze real estate investments:

• Mortgage Calculators: Estimate monthly payments based on interest rates and loan terms.
• ROI & Cap Rate Calculators: Quickly determine the profitability of an investment.
• Rental Yield Calculators: Compare rental income versus property price.

Final Thoughts

Analyzing a real estate investment requires using key metrics such as ROI, cash flow, cap rate, and rental yield. By understanding these financial indicators, investors can make smarter, more profitable decisions.

Need help analyzing your real estate investment? Contact us for expert advice.