How To Determine A Potential Investment Property (Part. 1)

Nov. 24, 2020, 9:45 p.m.

In this two part post, we will look at how you can analyze a property to determine its investment potential, if you’re gravitating towards the BRRRR strategy. 
 
However, in this first part, we start with:
  • How to analyze a potential investment property
  • Calculating cash flow

Let’s begin...

Investing in real estate, or the other way around, regardless, is a beautiful thing to behold, because of the fact that it offers an immeasurable possibility towards generating an income stream in no time...Of course, it takes time though.

 

Then there's the consideration for property management companies, or real estate agencies who are available to manage your property in a professional manner. 

Also in line with their existence is their ability to manage every aspect of owning a rental property which you may occasionally feel reluctant to get involved in. Moreover, these property management agencies also specialize in property staging, reeling in clients, collecting rents and everything between.

In a different shade of blue, where real estate investing sticks out like a sore thumb, it's all about some math and tons of education to help you through the process by crunching the numbers confidently.

 

Unfortunately, crunching numbers in this case is not for everyone. There are those who play down working with numbers, simply because it can be intimidating just by imagining all the factors involved in evaluating a property's investment potential; hence, to determine its worthiness.

In contrast, ask yourself if an ounce of number crunching will result in an early retirement and a clear cut financial independence, would you still hate it?

The reality is that not all properties analyzed will turn out to be great investments. Out of 50, or even 100 properties, only three or two will figure as ideal investments down the line.

At the end of the day, it all boils down to what good you've gotten out of crunching these numbers. All you need is a little persistence until it all makes sense.

After all, the more, the merrier; the more numbers you crunch, the easier the process turns out, and the better your position to accurately spot a great deal.

In which case, you will easily distinguish a good investment deal from a bad one, and will make a purchase offer confidently, without hesitance.

How to analyze your first rental property

Know the Area

Just before you begin analyzing a propety you think is investment worthy, you need solid data about the area in which the property of interest is in, specifically the type of neighborhoods and the market it captures. 

The following list contain some factors to consider before you begin your analysis:

  • Unemployment rate

  • Population growth

  • Industry – How is the job market?

  • Neighborhoods – Properties in excellent school districts attract long term family tenants, college towns attract student tenants every year, making vacancy low

  • Appreciation – Is the market continuing to grow and home value increasing over time?

  • Time on market – Are homes selling at, above or below asking price?

  • Typical selling prices

  • Rental market – Are there more rentals available than people looking to rent or vice versa?

  • Gentrification – Are neighborhoods being rehabbed, built-up or repurposed into popular up-and-coming areas?

 

Once you possess all this information, it's time to crunch the numbers till they make sense. 

On top of that, there are three key calculations you want to do, in order to elicit a good idea of whether or not this property is the investment you're after.

1. Calculate cash flow

Before kick starting your business of rental real estate, it's highly critical that you, as an aspiring landlord or property investor, gain a concrete handle on how to calculate cash flow.

Besides, cash flow is the lifeline of a rental property business. Better yet, calculating cash flow is not as complicated as brain surgery.

In the realm of real estate investment properties, cash flow talks about the difference between the total rent collected (income) - be it weekly or monthly - and the total expenses (including financing costs/debts).

In essence, there are two types of cash flow: negative and positive. The former means an investment property has more income than its expenses, while the latter mirrors the process in reverse. 

How to calculate cash flow
(Cash flow = income - expenses)

Calculating cash flow is a fairly simple process:

  1. Determine the gross income from the property.

  2. Deduct all expenses relating to the property.

  3. Subtract any debt service relating to the property.

  4. The difference is the property's cash flow.

 

Gross rental income refers to an investment property's total income before offsetting expenses and/or mortgage payments. There are some properties, for instance, like a single-family rental, that will only have a single source of income, equating to the rental income itself.

Others, especially commercial buildings, will enumerate additional income streams such as on-site laundry, late fees, pet fees, or product sales like key tags, caps, and more. Principally, rental property expenses, including income, will differ by property type.

For example, commercial properties that have net leases may have fewer expenses to worry about than a residential rental property that gets by a gross lease.

Moreover, some of the common rental property expenses look something like these:

  • Repairs 

  • CapEx

  • Principal and interest payment

  • Vacancy

  • Taxes

  • Management fees

  • Utilities

  • Insurance

  • Closing costs


We hope you found this article useful. Stay tuned for more to come in part two, where we will expand on the three key calculations involved in analyzing a potential investment property.

 


Disclaimer

This article is meant for informational purposes only. Hausples digs into the details of a specific topic and teaches its readers all about how the real estate industry operates. Therefore, not all articles are intended to be construed as financial, or investment advice. Hausples encourages you to reach out for professional help regarding your own real estate situation.







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