Real Estate Investing: How to Recognize A Great Deal
So you think you found a great deal on your first investment property, but how do you really know? If you haven’t looked at the numbers, and I mean more than what the sale price is, then the fact is that you don’t know.
There are several key components to look for, starting with the gross rental income for the past year. The gross rental income should be based not on what the seller tells you the monthly rent is per unit, but rather on actual rent collections for the past year. If there are non-paying tenants in the apartment, you will never know if you base your gross rental income on the leases.
Investing
I like to ask the Real Estate agent for a copy of the prior year’s rent collection. If they don’t already have it, the owner can usually provide this information fairly easily.
The next set of numbers you want to know are the expenses for the property – everything from utilities and landscaping to property taxes. Make sure to verify the expenses for the past year so you know your calculations are based on actual activity. Again, the owner will have the records of actual bills paid, or if you are familiar with the area, you should have a sense of what expenses are like in the local area for items like landscaping, and maintenance. Ideally, the owner should be able to give you this information in an easy to understand spreadsheet. Also, be sure to check some of the information against other comparable information you receive from your local real estate agent.
Lastly, subtract the total property expenses from the gross rental income to determine your net income before debt servicing (payments for financing). The amount you have left over after all property expenses and debt payments have been made is your net cash flow. That’s how much money you can reasonably expect to take home every month and year with the property you plan to purchase.
Once you have your annual expected cash flow divide it by the amount you plan to invest (usually your down payment) and that is your estimated return on investment. These days a return of 8% or more is considered a good return. If the return on the investment is enough to make you happy and is comparable to what other properties you have looked at are generating, THEN you have a good deal. cgerals
So you think you found a great deal on your first investment property, but how do you really know? If you haven’t looked at the numbers, and I mean more than what the sale price is, then the fact is that you don’t know.
There are several key components to look for, starting with the gross rental income for the past year. The gross rental income should be based not on what the seller tells you the monthly rent is per unit, but rather on actual rent collections for the past year. If there are non-paying tenants in the apartment, you will never know if you base your gross rental income on the leases.
Investing
I like to ask the Real Estate agent for a copy of the prior year’s rent collection. If they don’t already have it, the owner can usually provide this information fairly easily.
The next set of numbers you want to know are the expenses for the property – everything from utilities and landscaping to property taxes. Make sure to verify the expenses for the past year so you know your calculations are based on actual activity. Again, the owner will have the records of actual bills paid, or if you are familiar with the area, you should have a sense of what expenses are like in the local area for items like landscaping, and maintenance. Ideally, the owner should be able to give you this information in an easy to understand spreadsheet. Also, be sure to check some of the information against other comparable information you receive from your local real estate agent.
Lastly, subtract the total property expenses from the gross rental income to determine your net income before debt servicing (payments for financing). The amount you have left over after all property expenses and debt payments have been made is your net cash flow. That’s how much money you can reasonably expect to take home every month and year with the property you plan to purchase.
Once you have your annual expected cash flow divide it by the amount you plan to invest (usually your down payment) and that is your estimated return on investment. These days a return of 8% or more is considered a good return. If the return on the investment is enough to make you happy and is comparable to what other properties you have looked at are generating, THEN you have a good deal. cgerals