Evaluating an Investment

One of the challenges of evaluating an individual property is that the situation can change immensely based on how the property is purchased. How much money is put down? What is the mortgage payment? The answers to those questions depend entirely on the investor themselves and their situation. So the exact same property might be a good investment for one person with a better credit rating and more cash available, but could be a bad investment for another person.

You can try to normalize these factors by using tools typically used in commercial investments, such as cap rate or IRR. The challenge is that the tools may not take into account large expenses that could arise based on evictions, repairs, or capital expenditures. Over time, it is much easier to use those tools to evaluate the return on your investment, but it is more difficult to use them proactively.Youcanreadmoreonthese or . here here

Having said that, you should still use a tool, a spreadsheet, or something to evaluate each property independently prior to purchasing. is an example of Here one. You'll need the following info to truly understand the investment. I have includedsomeestimatesforyoubasedonmarkettrendsandhistoricaldata.

Expenses:

Ÿ Annual taxes (varies)

Ÿ Annual insurance (~$500 but could vary)

Ÿ Annual maintenance and capital expenses estimate (~10%)

Ÿ Professional property management/leasing cost (~10-12%)

Ÿ Vacancy cost (~5% over the life of the investment)

Ÿ Mortgage payment (varies depending on how you buy)

Ÿ Cost of buying

Income:

Ÿ Market Rent (here I would recommend consulting a property management company - finding an accurate number through simple online research can be misleading and often inflate actual rent amounts)

All of the above should also include an increase of 2-3% per year over the life of the investment. By simply using an Excel sheet or any tool available online, with the numbers above, you can calculate or estimate cash flow. As a rule of thumb, when you're comparing the total monthly mortgage payment (including PITI) to the projected market rent, you will want to have at least a few hundred dollars differencetoaccountforthetrueexpensesontheproperty.