I want to buy an investment property, how do I evaluate the investment returns?

How do I figure out if it is a fair deal?
  • September 13 2010 - Gridley
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Answers (18)

Here is some useful information for figuring your NOI (net operating income) for a investment purchase. Click on this link from Wikipedia.
  • September 13 2010
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You'll want to look at your cap rate among other things. 

The only reason you care about cap rate is that you're really trying for an easy proxy for what kind of cashflow the investment is going to generate. In investing cash is king – ignore this calculation at your peril.
Estimating cashflow entails plotting out the major expected cash outflows (taxes, principal, interest, expenses, vacancies, fees, repairs) and comparing it with the income that the property produces. You can do this either via a spreadsheet or using a real estate evaluation software package.

Cap rate is simply the annual net income divided by the price of the property. For years investors have been using the "1% rule" which simply states that the monthly rental income for a property should be roughly 1% of the price that you pay for the property. Some markets have moved away from this ratio due to rocketing property values, but in others you can still find properties that fit the 1% rule. Something that you should keep in mind, though, is that the 1% rule of thumb is a fair indicator of whether or not the property is going to generate enough cashflow on an annual basis to cover mortgage payments plus expenses. There, of course, are a lot of variables that go into this (from taxes, to interest rates to the percent down payment that you pay) but it's a starting point.
  • September 13 2010
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Here is a link to an excel sheet with cash flows ect.

Gary Tharp APOD

My math is not so good...okay bad and this is a fairly simple worksheet to help you with the numbers.

Consultation with someone to represent you and your CPA.
  • September 13 2010
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There are a number of types of investment property, including residential (both single family and multifamily) and commercial (including retail, office, industrial, etc)

Depending on the size of the investment you could buy any of the above as investment property. 

If you are just starting out, and just want to get a taste of real estate "hands on" I'd recommend a single family home or condo.  If you are going to manage it yourself (rent it, collect rents, do repairs, etc) or you can hire a management firm which will do this things for a percentage of the gross income (usually 5-10%) depending on the size of the investment.

Anothe consideration is how close is the property to where you live.  I you are going to self manage I suggest a property no more than 1 hours drive.

These are general, generic ideas and I'd need to know more of what you were looking to do to give you more detailed advise. 

And one final note, make sure your investment throws off a positive cash flow after all expenses (including an imputed vacancy factor- ie you might not have it rented for the entire year).  This will depend upon how large is your downpayment, the loan size and rate and the rentals for your specific property.

I hope these guidelines are helpful.






  • September 13 2010
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Clever little thing with the Phone number Richard Kent Realtor....

Maybe all the Agents/Pros should do it

Even shows up when looking on the Questions asked page if you posted last..
  • September 13 2010
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Utilizing the investment property annual expenses and income, the industry standard calculations that are studied closely for investment financial analysis are:

-Cash-on-cash return = down payment/cash flow before taxes
-CAP rate = net operating income/purchase price
-Return Rate = gross operating income/purchase price
  • September 13 2010
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This article will be a good starting point: Calculating Return on Investment in Real Estate

Also, look for cap rates over 6%, ideally over 8%.

Good luck!
  • September 13 2010
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All of the answers seem to be pointing you in the right direction, but experience has taught me that just as important as being able to run an investment analysis, is learning from investors that have gone before you.  I recommend you to sit down with an experienced investor/landlord and get as much advice as possible before you start to invest.  In the long-run will save you lots of time, energy and money.

Over the years I have read dozens of real estate investment books.  Here are two books that should be required reading for every investor.  The first gives great general advice.  The second is a financial analysis reference book for real estate investors.
1. The Millionaire Real Estate Investor by Gary Keller (as in Keller Williams Realty)
2. What Every Real Estate Investor Should Know about Cash Flow by Frank Gallinelli 

I am not only an Agent with a degree in Finance, but an investor and landlord as well.  With lots of hard work, planning and determination, investing in real estate is a great way to build long-term wealth.  Good luck.
 

  • September 13 2010
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Speak w/ a seasoned, commercial or residential investment firm. You will see numbers like ROI: Return on Investment; Break Even Point; Cap Rate; Vacancy Rate. Don't read books: although the publications are informative, they fall short of discussing your unique, financial circumstances w/ a professional and THEY DON'T PENCIL OUT THE NUMBERS WITH ALL OF YOUR HARD EARNED MONEY AT THE BOTTOM LINE. Spend a few bucks on a consultation BEFORE you invest, rather than on mitigating an error in YOUR accounting. Abundance...Lyn.

  • September 17 2010
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All the agents here are right. You have to start with NOI and put together whole APOD sheet. Once you have these, you can actually calculate the returns. There are various methods - but I would recommend "Internal rate of return" - IRR.

It is much harder to calculate than simple cash on cash return, but it is also much more exact. You can either use excel spreadsheet for this, or some real estate investment software, such as: http://www.RealEstateAnalysisFREE.com (it's free).
  • November 27 2010
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Your post is spam for your website. Sadly it has been flagged. Please read the policy for posting Mr. Kincl here. Self promotion is discouraged to make the board a friendlier place for people to ask questions and discuss.
  • November 27 2010
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It would 1st depend on the use of the investment property then th etype (Single Family home, apartment complex, retail, etc)....bottom line your real estate agent shoul dthen help you determine the return on your investments as they will know all the answers to the questions I just posed...best f luck
  • November 28 2010
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if u want best investment property so contact me - 7838127172
I will tell u the best deal
  • May 23 2013
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What you are looking for is the IRR for the property, which requires quite a bit of information and a formula. Commercial Brokers  can evaluate it for you using these math formulas.
  • May 23 2013
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  • December 18 2013
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In case of investment property you can calculate gross rent multiplier by using monthly rent/asking price.

  • December 24 2013
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  • December 24 2013
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  • February 03
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