Buying a property and joining the world of real estate is exciting!
Finding the best property is the catch.
Let’s start with quantitative side of the analysis. There are many performance measures an investor can take into consideration while analyzing real estate investments. In this article we will focus on Cash Flow and Net Operating Income.
A. Cash Flow
This number tells the monthly or annually profit from the property. Why is this number so important? A negative or break even cash flow indicates an investor should walk away.
1. The first step in the investment property analysis is doing homework and finding out how much the following costs are. Make sure to get approved from a bank before searching for properties and their numbers.
2. Let’s start with investment costs:
- Home Price (cash or down payment)
- Closing costs
- Inspection cost
3. When calculating monthly expenses, find out and add up these costs:
- Mortgage Payment (principal + interest)
- Property Tax
- Property Management
4. To determine monthly income:
– See how much rent tenants are currently paying
– If there are no tenants, evaluate the rental income of nearby properties and consult a realtor or property manager about how much income to expect
– Go with the lower end of their estimates for an investment property analysis.
5. Calculate Cash Flow:
Monthly Income – Monthly Expenses = Cash Flow (should be positive)
Tip: Calculate in an additional mortgage payment per year to pay off a 30-year mortgage in 18 years. If buying an Airbnb investment property, don’t forget to include additional costs such as host service fees.
B. Net Operating Income (NOI)
This number tells the income for a property excluding the acquisition costs.
1. Add up income and multiply by 12 months.
Monthly Rent X 12 = Annual Income
2. Add up expenses and multiple by 12 months – again, this excludes the mortgage payment.
Monthly Expenses X 12 months = Annual Expenses
3. Deduct expenses from income to get NOI.
Annual Expenses – Annual Income = NOI
Tip: This measurement is not enough to make a decision. This is useful for analyzing multiple real estate investments at once.
More information on the Part 2 of this article.