How do you go about evaluating real estate in a strictly financial way. The methods below should illustrate the most common ways. Keep in mind that other factors shouldn\'t be neglected. Key elements like location, age of property and condition. Not a crucial factor but some folks like to have their properties near where they live so they get drive by etc. whenever they have the urge.
Note: the methods below can be used for commercial and residential. Usually for individual resident units other than duplexes, triplexes, fourplexes etc. one would use a Residential Market Analysis. However, it is good to look at real estate investments from a multitude of angles.
Net Operating Income NOI - All expenses for the year except interest and depreciation. Determine NOI.
Cap Rates - Divide Sales price into Cap Rate - this gives you NOI.
\r To determine the Cap rate divide NOI into a desired Cap rate number.
Example $20,000(NOI) divided by 9% Cap = 222,222 - probable value of the investment property. \r Note the lower the Cap Rate the higher the price you are paying relative to the properties actual value. Rentals in quality locations will bring 8 - 9% cap rates. Lesser locations with higher Cap Rates in the low teens are risky and should be avoided - unless the upside (renovations etc.) out weighs the risks. By the way, this is how Don Trump made his millions. He turned around investment properties no one else wanted and made huge gains.
Cash on Cash return - This is your net bottom line - after all expenses - Divide the NET by the Cash you put down.
60,000 Purchase price
\r 12,000 Down payment
\r $2,340 - per year rents/Net/net (assuming your expenses were - interest was $240 per month, HOA fees, taxes, ins., misc. etc - but you collected $7200 - 12months @ $600.00)
\r Then divide $2340 by $12,000 - 19.5 is your Cash on Cash return.
\r Remember - your still writing off the interest and depreciating the building - all money back into your pocket a tax time.
\r Appreciation - It a \"Steady Eddie business\" - buy and hold.
\r Expect 5% - 10% gains per year...the average over the last 10 yrs.
*Also, take into account vacancies and other misc. expenses
So I hope that gives you at least an idea. Consult an experienced agent for more information.
By Mark Tait
\r http://www.marktait.com
Mark Tait is a licensed REALTOR in Arizona. Visit him at http://www.marktait.com
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