Property investment profitability can be analyzed through various ratios and measures.
The most commonly used measure of assessing property investment performance is the internal rate of return (IRR), which uses the discounted cash flow model. In this model we analyze carefully all the projected cash inflows and outflows (as they pertain to the owner of the property) over a particular holding period and on an after-tax basis, in order to determine the expected annual rate of return that the investor will earn by acquiring the property.
It should be noted that in this analysis we take into account the purchase price of the property, any periodic mortgage loan payments that the investor will have to disburse if borrowed money are used to finance part of the acquisition price, as well as a resale price projection and payment of remaining loan balance at the end of the holding period.
Since borrowed funds are commonly used when acquiring property for investment purposes it is very important to take into account the periodic mortgage loan payments and the repayment of the remaining loan balance at the end of the holding period when analyzing property investment performance. Another measure of property investment profitability is the profitability index.
