Home Finance Understanding the Financial Analysis of Real Property Investments

Understanding the Financial Analysis of Real Property Investments

by Biljana Denic

When considering where to invest your money, there are many tempting options. Here we primarily mean buying cryptocurrencies and investing in the stock market, which seems like a quick and easy way to make big money. However, with this type of investment, you risk losing everything because the situation is constantly changing and if you are unlucky, you will be left without everything invested.

That is why everyone who wants to invest but does not want to take risks buys real estates. That is one of the best ways to generate income while at the same time keeping all the money you have invested. You have property you bought which will always be worth same or even more then when you bought it. And you are constantly earning more and more on the basic of that real estate because you will rent it. Renting will allow you to accumulate capital and invest further in this or something else. Still, it is a little more complicated than it sounds. Especially when buying your first real estate, you need to think about a lot of things and the decision must not be made lightly, because it is still a big investment of at least few tens of thousands of dollars. We will help you better understand the financial analysis of real property investments.

1. Determining the value

Source: medium.com

Financial analysis of real property investments is a very complex thing that is best started by determining the value of the property. Different properties are worth differently which is logical but you need to determine exactly how much it is worth.

There are so many different types of properties, from small flats, then single-family homes to huge properties that have multiple unites and so on. Therefore, there is no one way to determine the value of each property. What you need to take into consideration is the layout and number of rooms and bathrooms, then all the additional rooms that exist, garages, yard and so on. This will all have a much bigger impact than just trends, so don’t think that if a property similar to yours has gained or lost in value, the same will happen to yours.

2. Have all the information

In order to be able to do a financial analysis, you need to have all the information regarding the property in which you want to invest or you already have it. When we say everything, then we mean it literally and also make sure that it is completely accurate information. There is no room here for something to be roughly, everything has to be exact. Only then will you be able to create an accurate financial analysis.

This data includes first everything related to the property characteristics themselves, such as squaring and the like. Then how much will the purchase cost you or if it is already owned by you, then find out the tax. Then you need information on how much repairs, improvements and so on will cost. If a mortgage or loan is included, this should not be ignored in the calculation. Lastly, you need to know the monthly expenses and income that this property will generate.

3. Cash flow

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Cash flow is not difficult to understand or calculate, if you have done the previous step in the right way and gathered all the necessary information. Cash flow is all your income and expenses that you have related to real estates.

Income usually includes rent payments or other income if any, and expenses are expenses for bills, maintenance and more. If you do not have a real insight into cash flow, it can happen that you have the wrong impression that your property is profitable, and that you are actually losing money.

Since there is a lot of income and expense, it is easy to get lost in all these numbers. Especially if it includes loans and mortgages. Then there are a lot of bills that have to be paid, taxes, then management that involves paying the accountant, building manager and so on.

Don’t forget to include all those periods when your property was empty, which means that no one paid rent. Know that such periods will always occur, it is almost impossible for it to be rented constantly during the time of your ownership of that property.

4. Taxes

Taxes have to be something you will analyze separately because the IRS will have its own ways of calculating it, and you have to be familiar with that. Of course, the more you earn, the more taxes there will be, but that’s actually a good thing.

However, you need to know if there are any local laws that will treat your income from investing in real estates in a special way. So find out these details before investing, because an offer that may seem very tempting to you at the beginning, may later turn out to be unfavorable when taxes are included.

5. Gross rent multiplier

Source: mashvisor.com

Gross rent multiplier is a term you should be familiar with. It is actually the ratio of the money you have invested in real estate and rental income.

As it can happen that there are a lot of properties that meet your criteria, then it is practically impossible to do a detailed financial analysis for each of them. And that’s why you need to narrow down your search by using a gross rent multiplier. The general rule is that the gross rent multiplier should not be more than 100. But everyone has their own approach and you shouldn’t be automatically repelled if that is the case.

You also need to analyze the flexibility of the real estate seller and many other things. In any case, gross rent multiplier and real estate investing analysis tools like Privy should be something you will use regularly to save time without compromising your investments.

Conclusion:

Real property investment usually means that you will spend at least a few tens of thousands of dollars, and maybe a few hundred thousand dollars. That is why financial analysis must be an indispensable part of investing in order to be successful.

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