The first thing you need to take into consideration when you are thinking about an investment property is that there are two types of data. The first is qualitative and the second is quantitative.
Quantitative
Where’s your cash going? What are your returns?
Cash flow:
It is important to determine your cash flow as part of your investment property analysis because you want to make sure that before anything of monetary value has exchanged hands that you are getting what you want out of the exchange. A profit. If the number for your income is negative or pretty much equal to the price of your outgoings then it is not worth it. You will not be making much or any profit at all. You need to look at:
- The costs of the investments – How much are the down payment, what are the closing costs, how much are the inspection company quoting, does it need any refurbishments etc.
- Monthly Outgoings – Mortgage, tax, do you have someone managing the property for you? if so their salary, maintenance of the grounds and property, utilities (unless this is under the care of the tenant).
- Monthly income – Combined rent of all tenants, if you are starting out fresh then look at the rental income for properties nearby and of a same standard to your own investment property, for the sake of ease go with the lower estimate. It’s always better to have more profit than expected rather than less.
- Cash flow = monthly income – monthly expenses
You also need to work out your Net Operating Income, which is the whole income for the property before you have made any acquisition payments.
As well as cash flow there are other things that need to be calculated and taken into consideration when doing your investment analysis.
One of them is working out the return on your investment and whether or not the return is good enough.
The next is capitalization rate. This is a very good one to look at because it shows you how much the property will be returning to you without the help of any financing. So no matter how it is you decide to finance this big move it speaks the truth to the investment. It is worked out by dividing the NOI by the price of the property.
If you find this is all looking a bit too confusing, there are companies that can help you to work out how to do a correct investment property analysis. These include companies in Minnesota, USA. One of the best tips that can be given whether you are considering buying an investment property for the first time, or if you are a seasoned investor is to always stick to the budget. If you don’t it can really mess up the accuracy of your analysis.
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