OfflineWhen doing your basic financial analysis on a potential
investment property, there are just a few numbers that
you're concerned with when it comes to the income evaluation for determining your return. This is necessary to help you determine a "Good Buy" from a "Good BYE" when analyzing properties!
Keep in mind that this is not the total analysis, but
just a basic income/return picture. When looking at properties, or having your virtual assistants do this work for you. You will be looking at ARV (after-repaired-value), rehab costs, purchase price and income evaluation.
This quick lesson here addresses the short version of income calculation.
In case you don't already know this, Net Operating Income is your Gross Income minus youre expenses.
Think of it just like a paycheck. If you make
$10/hour, and you work 8 hours, it's $80. That's
not your Net Income because you're going to pay
taxes, social security etc. If you deduct all those expenses, you will get your Net Income (NOI).
In real estate, we have the Gross Income. It's all
of our income from the property-rents, parking, laundry income, anything you might collect on a particular property. That amount minus our expenses equals our NOI.
To get the NOI before the spreadsheet is filled with
actual rents from your property manager, the taxes from
the realtor, the insurance from your insurance person, we
do a quick analysis and we use a 0.65 factor.
What that means is, ff you run the property efficiently, you should net roughly 65% of the gross income. Some properties may net you a little more or less, but using the .65 factor, I typically come within 1%-2% of the actual numbers. What I do is take my NOI and multiply it times .65 and then divide that number by the price I pay for the property and that will give me my cap rate. Im looking for a cap rate of ten and above.
Also, keep in mind that I most often farm out the basic initial financial analysis part of my research to my virtual assistants, but you need to learn to do it yourself before you farm it out.
You need to understand the financial analysis and if a deal makes good sense or not. It's all in the numbers and the numbers don't lie! Knowing these figures is what will protect you from getting hurt financially. Some people don't understand this, they lose money and then they say that real estate is a bad business. It's not a bad business. You will
make some mistakes but if you do this part the right way, even if you insist on calling it a risk, it's definitely a calculated risk.
Remember, The numbers don't lie. There's no emotion tied to these numbers. It is what it is. And if a deal looks great on paper, you better snatch it up before the next guy does.
Bottom line, don't forget the Cap Rate Analysis Formula, which contrary to popular belief, works with commercial AND residential properties.
The formula again, is this:
NOI divided by Total Cash Invested. It's the Total Cash
Invested, NOT the asking price. Remember, we will not be
paying the asking price. We'll be paying the numbers which
make sense for us. (I'll rarely ever touch a deal with less
than a 10% cap rate on single-family property. In this market
there are deals available with CAP rates above 15% all day long.
"THE ARCHITECT OF YOUR DESTINY IS YOURSELF"
"SUCCESS WALKS HAND IN HAND WITH FAILURE"
You made it so simple. I can never seem to remember how to figure it out. Now I will!
Thanks.
Lauri
" The only difference between me and successful people is they started before me."
by Shane
Just bookmark it so you can come back and read it when you need to.
"THE ARCHITECT OF YOUR DESTINY IS YOURSELF"
"SUCCESS WALKS HAND IN HAND WITH FAILURE"
Calculations can be difficult sometimes, but paying attention to the
numbers can really work in your favor.
Thanks .