How to Evaluate Real Estate Investments

Investing in real estate can provide you with a way to benefit from long-term appreciation and short-term cash flow. When you invest in real estate, you have to know how to evaluate each property if you want to be successful in this endeavor. Not all investment properties are created equal and you have to be able to separate the good from the bad. Looking at the amount of rent that you can charge in relation to the cost of the property is crucial.

Instructions

1. Hire a real estate agent to help you with the process of finding rental property and evaluating it. Real estate agents know the market in your area and they can help you determine if a property is over- or under-priced. While you might prefer to work alone, hiring a buyer's agent can pay big dividends.

2. Look at the listing price of the property in relation to what other similar properties in the neighborhood or subdivison have sold for. Your real estate agent can pull this information about comparable properties for you. Look for properties that are priced below what other similar properties have sold for or that will produce your desired returns.

3. In evaluating a property, take the likely net operating income and divide it by the asking price. This gives you the capitalization rate for the property. To get the true value of the property, you can take the total operating income of the property and divide it by the capitalization rate. If the true value is greater than the asking price, you are dealing with an undervalued property.

4. Estimate how much rent you could charge for the property that you are considering by having your agent provide lease comparables for the neighborhood. You can break the rent prices down to per square foot. Then you can multiply the per square foot figure by the number of square feet in your prospective rental.

5. Estimate the expenses of your prospective rental property. Find out how much you will have to pay in taxes and insurance. Estimate monthly maintenance costs (many investors use 5% of the gross monthly rent). You will also have to include the mortgage payment if you do not pay cash for the property and factor in vacancies (use $10% of monthly rent).

6. Calculate the cash flow of the property by taking the expenses and subtracting them from the rent. If the rent is higher than the monthly expenses, you have positive cash flow. If the expenses are higher, you may want to look for another property. While you could operate with a negative cash flow every month, it can be a financial burden.

7. Evaluate the cash on cash return of the property. To calculate this figure, take the net cash flow and divide it by the cash investment in the property. This tells you how much return you can expect from your cash after maintenance and repairs are taken out of the rent each month.

References

• Joe Lane: How to Evaluate Investment Properties for the Purpose of Renting Out to Tenants
• Real Estate: Evaluating Investment Property
• PT Money: Should You Buy a Real Estate Investment Property?
• Investment Properties Info: Analyzing the Value of Property
• Landlord's Cash Flow Analyzer: Cash on Cash Return