In: Commercial Construction0
Purchasing a rental property can help you generate income and build your investment skills. However, before you buy a property you’ll rent out, do a rental property analysis to ensure that it is a smart and sound place to put your money.
If you want to learn how to do a real estate investment analysis effectively, the following tips may help. By spending some time learning how to analyze a rental property for its risks and potential rewards, you can ensure you’re investing money in a project that will end up paying off in the long run.

Understanding the Market and Property

One of the first steps in completing a successful rental property investment analysis is understanding the real estate market and the area where the property is: what typical prices are there, what typical residents look for in a building, and if there are any drawbacks to the area.

When you find a property you are interested in, getting a property appraisal done helps you understand how much a building is deemed to be worth — and whether you’re putting an appropriate amount of money up to buy it. This appraisal will play a crucial role in your financial analysis for commercial investment real estate.

Calculate Investment Costs

The first step in the process of a residential or commercial real estate investment analysis is to be clear about the costs of your investments:

Cash Flow

Cash flow measures what an investor profits from a real estate investment. You want your cash flow to be positive — otherwise, you’re losing money (or wasting time) on your investment. To figure out cash flow, calculate the following:

  • The monthly expenses of owning, running and maintaining the property (mortgage payments, insurance payments, property taxes, costs for rental property management in Houston, maintenance, utilities and more). Remember to account for vacancies that are costing you money.
  • How much money you’re making each month: rent you receive (or similar rent of nearby properties if your building isn’t occupied yet).

Then, subtract your monthly expenses from your monthly income. The number should be positive.

Net Operating Income

When you calculate the net operating income, you figure out how much income you’re bringing in each month minus what you paid for the property. To calculate your net operating income:

  • Multiply your monthly income by 12 (for 12 months)
  • Add up your monthly expenses, then multiply by 12
  • Subtract your annual expenses from your annual income

Make sure you get a positive number.

ROI

Return on investment (ROI) is the number that shows you what you’re actually getting for the number that you put out. To find your ROI:

  • Take your cash flow, then add your mortgage principal payment to it
  • Multiply this number by 12 in order to find the annual return
  • Divide the annual return by the total amount of your investment costs

To figure out if you’re getting a good ROI, you need to understand the following:

Cash-on-Cash Return

Cash-on-cash return shows you what you’re getting back based on the amount of cash that you initially invested. To determine cash-on-cash return, simply divide your net operating income by your investment costs. As long as the number is at least 10 percent of your investment, your investment is most likely doing well.

Capitalization Rate

The capitalization rate of a property shows what it’s generating for investors — without factoring in financing. To find the capitalization rate, divide the net operating income by the price of the property. The capitalization rate should fall between 8 percent and 12 percent.

Before you invest your money in rental real estate, learn how to do a real estate investment property analysis so you can understand where the potential rewards lie — and what the financial drawbacks may be as well. By learning the basics of an investment analysis for real estate decisions, you can ensure you avoid any investment that is too risky — and may end up reaping generous rewards from your decision.

Contact Rise Construction today for more information on rental property management for your Houston real estate investments.

Leave a Reply

Your email address will not be published. Required fields are marked *