Analyzing real Estate Deals.
You can use several techniques to analyze a real estate property to determine if it will cash flow.
You will hear me say repeatedly, but you must have a strategy or a buy box when you purchase real estate. Cashflow is ideal, but don’t let it be the ONLY reason you make a purchase.
Education is power. Below are the most common numbers I used when running numbers. Stay tuned for another post on how I find my projected income for properties.
Here are some essential methods:
Net Operating Income (NOI): Calculate the potential rental income by subtracting the operating expenses (property taxes, insurance, maintenance, property management fees, etc.) from the gross rental income. This will give you the NOI.
Cap Rate: The capitalization rate is calculated by dividing the NOI by the property purchase price. A higher cap rate indicates a better potential return on investment.
Cash-on-Cash Return: This method divides the annual cash flow by the initial cash investment (down payment, closing costs, renovation expenses). It provides a percentage showing the yearly return on the invested cash.
Debt Service Coverage Ratio (DSCR): This ratio is calculated by dividing the property's Net Operating Income by the annual debt service (mortgage payments). A DSCR more significant than 1 indicates that the property generates enough income to cover its debt obligations.
Break-Even Ratio: This ratio indicates the level of income required to cover all operating expenses. It considers the total debt service and operating expenses and divides it by the gross operating income.
Vacancy Rate: To estimate potential income fluctuations, consider the average vacancy rate for the area where the property is located.
After-Tax Cash Flow: When calculating the property's cash flow, account for tax implications by considering depreciation, tax deductions, and any applicable tax credits.
By utilizing these techniques and conducting thorough due diligence, you can assess whether a real estate property has the potential to generate positive cash flow. Considering both short-term and long-term factors is essential when evaluating an investment opportunity.
As always, this is my personal experience in real estate. If you need help or have questions, please reach out below.
