"If you can't explain it simply, you don't understand it well enough." ~ Albert Einstein

In real estate investing, success hinges on more than just intuition or market trends. Thorough, efficient and focused analysis is essential to making informed decisions and mitigating risks. Whether you’re purchasing a single-family rental property, a self-storage facility or a multifamily property, understanding the financial and market dynamics can mean the difference between success and failure.

In this post, we'll cover the various asset classes available to investors and the primary property types within the real estate asset class. Next, we’ll cover the purpose of real estate analysis, what questions it should successfully answer, what is involved and the key benefits. Finally, we'll discuss some of the major components of real estate analysis.

This post covers:

• How real estate fits in the broader investment asset class mix.

• What are the two broad property types in the real estate asset class

• The difference between valuation and analysis

• The key benefits of real estate analysis

• The Six most important metrics you should know

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Real Estate Asset Class

Real estate analysis involves evaluating the potential performance and risks associated with a property.

Before we go any further in our discussion of real estate analysis let’s first look at the big picture. Investment opportunities are organized into groups of financial instruments that have comparable characteristics and exhibit like behaviors in the market (Yieldstreet). Some examples include stock, bonds, and a large group called alternatives. Within the alternative asst class you will find real estate along with private equity, and crypto.

Further still within the real estate asset class you will find two broad property types: commercial and residential. Commercial Real Estate (“CRE”) includes any property that generates income such as hotels, retail, self-storage and even land. On the other hand, residential property is simply real estate for living and it includes single-family homes, condos, and multi-family properties. However, if the multi-family property holds more than four units, it is classified as CRE. This key distinction plays a big part in how we value and analyze real estate investments.

The value of residential real estate is determined by the comparable sales approach which assigns a market value to a property based on the recent sales of similar properties within close proximity to the subject property. In contrast, the value of CRE is determined by the income capitalization approach which assigns a market value to the property based on the property’s Net Operating Income (“NOI”) relative to the overall rate of return on capital required by investors of similar investment properties (Eldred). This required return is known as the Capitalization Rate (“Cap rate”) and is an often used but misunderstood concept.

To illustrate how these two approaches yield very different results let’s consider a scenario with two properties: Property A and B which are in the same neighborhood just a few feet apart. Property A, a fourplex built in 2010, is 4,000 square feet, features luxury amenities and generates an annual NOI of $144,000. Property B, a five-unit apartment built in 2000, is 4,000 square feet, features only the bare necessities and generates an annual NOI of $100,000. In the last 6 months, there were three sales transactions of similar fourplex properties with an average sales price of $250 per square foot. Currently, the prevailing Cap rate in this neighborhood is 8%. Below illustrates the resulting indicated sales price of each property:

As you can see, Property B, which has a lower NOI, fewer amenities and is an older property is 25% more than Property A. It is these favorable economics that make investing in commercial multi-family properties so attractive, and this asset group is the focus of many CRE investors.

What we have just described are two very simple valuation techniques. An investor needs to have a good understanding of the value of a property but that alone isn’t enough. They need to be able to answer a few important questions all based on the quality of an investment before making an informed decision.

Real Estate Valuation vs Analysis

In the preceding example we discussed valuation but that alone is not enough. An investor shouldn’t decide based on a valuation alone. Analysis is the next step. Real estate analysis involves evaluating the potential performance and risks associated with a property. This process examines critical factors like market trends, property condition, financial performance, and the identification and mitigation of risks. A thorough analysis should address the following:

• Will the property generate adequate cash flows?

• Can you expect the property to increase in price?

• Can you add value to the property?

Using a series of objective metrics, you can compare multiple investment opportunities against each other. The ultimate goal is to determine whether an investment aligns with your financial objectives and risk tolerance. Some of the more common investment goals we've come across are

1. Speeding up retirement,

2. Reducing taxes,

3. Stability, and

4. Cash flow.

Having a good working knowledge of real estate analysis will help you reach your overall goals faster.

Key Benefits of Real Estate Analysis

Market understanding

Market analysis provides insights into supply and demand dynamics, demographic trends, and economic drivers. This involves researching local employment and population growth trends, and comparable property performance. This knowledge allows investors to target high-growth markets or avoid over-saturated ones.

Risk mitigation

Real estate investments come with inherent risks, including market volatility, unexpected expenses, and tenant turnover. A comprehensive analysis helps identify potential red flags, such as declining market demand or insufficient rental income.

Maximizing returns

Through proper analysis, investors can uncover opportunities to improve a property’s performance, such as value-add strategies, optimizing rental rates, or reducing operational costs. This ensures that investments achieve their maximum potential.

Informed decision making

By analyzing a property’s financial metrics investors gain a clearer understanding of the quality of the investment. This data-driven approach minimizes reliance on speculation and focusses the investor on objective and trusted data.

The Six Most Important Metrics in CRE

1. NOI One of the fundamental concepts in any business or investment. The net operating income is the total income (Gross Operating Income or GOI) after deducting certain expenses associated with operating a business or more specifically operating a property (Exp). It doesn’t include costs related to debt payments, interest payments, or even capital expenditures. The formula is:

   

2. Cap Rate As mentioned before, the Cap Rate is the overall rate of return on capital required by investors of similar investment properties. It’s the annual rate of return an investor would expect to receive for a certain asset in a specific market at the current time if the asset were to be purchased for all cash (Moore). Its calculated by taking the NOI and dividing it by the current market value (MV0). The formula is:

   

3. Annual Rate of Return The Annual Rate of Return (ARR), also known as the annualized return or simply the annual return, is a financial metric that calculates the gain or loss on an investment over a specific period, typically expressed as a percentage. ARR is used to assess the performance of an investment over a year, allowing investors to gauge how well their investments have performed. The ARR allows you to compare how different investments are performing relative to each other (Dikio). The formula is:

   

4. Total Return Total return (RT) is the complete measure of how much an investment has earned, including both the increase in the value of the investment and any additional income it generated, such as dividends, interest, distributions, and sales proceeds, if sold. It gives investors a broader understanding of the overall growth of their portfolio (Paul). The formula is:

   

5. Internal Rate of Return The IRR calculates the rate at which the net present value of future cash flows equals zero and can be used as a tool for making informed investments decisions. The IRR helps an investor evaluate the profitability of an investment or project.

   In order to understand this concept, you need to consider the concept of cost of capital which is the cost of using money to finance a business or other venture. It includes the interest that must be paid on loans and the return that must be earned on investment to make it worthwhile for investors to provide the capital. I like to think of this as what I could earn on my money if I put it to work on another investment. As a guideline, if the IRR is greater than the cost of capital, then the investment is profitable. If the IRR is less than the cost of capital it is unlikely to be a profitable investment. The higher the projected IRR on a project—and the greater the amount it exceeds the cost of capital—the more net cash the project generates (Bamigbola). The formula is:

   

   In practice, no one actually does this tedious calculation as excel can do it for you in seconds.

6. Equity Multiple The equity multiple is defined as the total cash distributions received from an investment, divided by the total equity invested. An equity multiple less than 1.0x means you are getting back less cash than you invested. An equity multiple greater than 1.0x means you are getting back more cash than you invested. An equity multiple of 2. 0x simply means that for every $1 invested in a project, an investor is expected to get back $2 (including the initial $1 investment). The equity multiple is a performance metric that helps put the IRR into perspective by sizing up the return in absolute terms. The formula is:

Let's bring these two metrics together with a simple example. Consider the following two investments:

If you looked at just the IRR alone then you would say that investment 1 is better. However, when you consider the equity multiple, you can see that investment 2, although with a lower IRR returns more cash to the investor over the same period of time (Property Metrics).

Conclusion

• Real estate analysis is the foundation of successful investing.

• It empowers investors to make data-driven decisions, minimize risks, and maximize profitability.

• Using key metrics, you can compare multiple investment opportunities

At Aries Capital Investments ("ACI"), we help you understand our Value-Add approach to CRE investing as a Limited Partner in our syndication deals with minimal involvement on your part. Investing with us is a great way to build and protect your wealth with average ARRs around 20%.

To learn more about how ACI can help you build and protect your wealth schedule a call with our principals today!

References

Bamigbola, Silas. "Internal Rate of Return (IRR) Rule: How It Works and Examples." 19 March 2024. https://www.supermoney.com/encyclopedia/internal-rate-of-return-irr-rule. Web. 07 February 2025.

Dikio, Daniel. "Annual Rate of Return: What it is and how to calculate it." 09 April 2024. https://www.supermoney.com/encyclopedia/annual-rate-of-return. Website. 07 02 2025.

Eldred, Gary W. "Appraisal: Ins and Outs of Market Value." Investing in Real Estate. Hoboken, NJ: John Wiley & Sons, Inc., 2012. 75-80. Book.

Moore, Paul. "How To Calculate Cap Rate For Investment Properties." 25 July 2023. https://www.biggerpockets.com/blog/cap-rate-real-estate. Blog Post. 07 02 2025.

Paul, Bamigbola. "Total Return: What It Is, How To Calculate, and Examples." 19 September 2024. https://www.supermoney.com/encyclopedia/total-return. Blog Post. 07 February 2025.

Property Metrics. "How The Equity Multiple Works In Commercial Real Estate." 28 December 2022. https://propertymetrics.com/blog/how-the-equity-multiple-works-in-commercial-real-estate/. Blog Post. 07 February 2025.

Yieldstreet. Understanding Real Estate Asset Classes and Property Types. 11 February 2024. Blog Post. 02 February 2025.

About Us

ACI is a privately held real estate syndication company that focuses on acquiring, repositioning, and managing value-add multifamily real estate properties in strategic emerging markets. Our vision is to transform lives through wealth creation.