Real Estate investment is a great way to achieve financial freedom and build a source of passive income; hence, why a lot of people look to invest in real estate.

One question that we often get asked is how to analyze real estate investment opportunities to ensure that you invest in profitable ventures. In this short guide, we lay down the basics of the steps you will generally take to build positive cash flow properties. Let’s dig in.

Location Analysis for Real Estate Investment

Before you start to scout for properties, you need to select the geographical location where you will concentrate. Location will determine the type of tenants you attract, property values, the rent you can charge, and any potential problems you might encounter.

Look for properties that are in appealing neighborhoods where people want to live. It should be close to work and study opportunities, crime rate should be minimal, and parks, shopping areas and public transportation should be within walking distance.

Figure Out the Financials

We suggest scouting out at least three to six properties so that you can compare your investment options. Once you are experienced, you will have a much better idea about a good deal when you see one. Until then, it is better to shortlist multiple properties or work with an experienced property investor for guidance.

Some of the important calculations you need to make include the following.

Rental Income

You can find out average rent for properties in the area by talking to people and working with local realtors. Average rental information is also easy to find through Public MLS.

Calculate how much rent you can expect to earn from the various shortlisted properties.

Average Expenses

Evaluate the average expenses you will incur for repairs and maintenance on the different properties. If you will be hiring a property manager, take account of his or her salary as well.

Calculate Mortgage Payments

It is very easy to get a property mortgaged these days. Given the low Fed rate, most landlords

prefer to get their properties refinanced through banks. Talk to mortgage banks to find out what your average mortgage payments will be.

Usually, property and hazard insurance is part of the mortgage payments.

Gross and Net Cash Flow

Gross cash flow is the property rent you receive minus the expenses incurred for renting out the property. Net cash flow is calculated by taking mortgage, insurance, HOA and other fixed payments into account and deducting them from the gross income.

Calculate the net cash flow for the different shortlisted properties to determine which one gives the highest cash flow.

Compare the Cash on Cash and Capitalization Rates

Cash on cash determines how much cash flow you will generate compared to the initial cash invested in the property. In most cases, you will probably put down anywhere between 5% - 20% of the property value as down payment. Your goal should be to generate the highest cash inflow for the initial cash invested in the property.

The capitalization rate calculates the net annual operating income on a property compared to the total price you have paid to acquire the property. Total price includes the principal, interest and other costs that you pay to buy the property. A higher capitalization rate makes the property preferable to invest in.

This short guide gives you a brief intro about the calculations and research you should carry out before investing in a property. For more help, please get in touch with us via email