INVESTMENT ANALYSIS OVERVIEW
Important Elements In Analyzing Investment Properties
Analyzing an Investment Property: Investing in real estate opportunities is the path to financial independence. Analysis Paralysis is not what you want to have when analyzing investment properties. When you see a good deal, make a decision fast. However, before doing that, it is cautious to run some numbers to find out whether a property is a good investment or not.
There are 5 important elements we look for and there are simple:
1. Income and Expenses
2. Net Operating Income (NOI)
3. Cash Flow
4. Cash on Cash Return
5. Capitalization Rate
Income: Is the life blood of the investment property.
Expenses: Are what you will be obligated to cover such insurance, taxes, management fee… Mortgage payment is not part of the expenses.
Net Operating Income: One of the most important terms. When the net operating income goes up, the value goes up, and the cash flow goes up. The opposite is true as well. NOI is income minus expenses.
Cash Flow: Is keen in any income producing property. It is the NOI minus the mortgage payment.
Cash on Cash Return: It simply means how fast your money is moving. It is the annual cash flow divided by down payment.
Capitalization Rate: Is the NOI divided by the sales price. The higher the cap rate, the higher the risk, the higher the potential return with a possibility of low price.
The rule of engagement should be:
• Income to be greater than expenses
• NOI to be greater than mortgage payment
• Cash Flow has to be positive
• Cash on Cash is Equal to or greater than 10%
• The Cap. Rate is equal to greater than 8%