Deciding if a property is a good investment

Real Estate Investment Analysis

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Deciding if a property is a good investment

Real Estate Investment Analysis allows you to quickly avaluate and compare several potential investment properties and decide which one is for you. It will help you decide if a particular property is the right investment for you.

Using figures you can easily find you can quickly determine the financial plusses and minuses related to a partilcular piece of property.

The first step to effective Real Estate Investment Analysis is to understand the income and expenditure related to particular investment property.

INCOME: Rental income is generally the first and only income stream most investors consider for an investment property. However in addition to the rental income you gain from an investment property your situation may warrant considering the capital gains as income.

I believe it's better not to sell...

Hint: When you want cash, consider refinancing your real estate investments - see RETIRING USING YOUR GROWING PROPERTY INVESTMENT EQUITY BASE if you keep your real estate investment properties you are not selling your retirement plans. You will need to consult an accountant to find the details of how you can declare capital gains as income but the general principles are out lined in this article: MAKE THE MOVE FROM HOBBY TO PROFESSIONAL INVESTOR

EXPENSES: There are two general types of costs (EXPENSES) associated with owning an investment property: interest costs and holding costs.

Income - Rental Return

The first thing you need to understand about rental return on an investment property is that verbal estimates by real estate sales people can be very misleading. That being said the way to determine a better idea of the real potential rentl return that a property might bring is to find out what similar prperties are renting for in the same area.

How to Calculate Rate of Rental Return

Rental return is calculated as a ratio against buying price. A rule of thumb calculation for rental return that many real estate imvestors use as a quick comparison is as follows:

Gross Annual Rent / Total Purchase Price Expressed as a Percentage

For more detail on calculating rental return, see How to Calculate Rental Return On a Real Estate Investment For example if you purchased a rental property for $300,000 and were renting it out for $300 per week then your rental return would be calculated as follows:

(300 * 52) = $15,600 / $300,000 (times 100 to express as a percentage) = 5.2%

I have found that if the resulting figure is in the vicinity of 6% or over you are in good shape. In the example above the rental return is a little on the low side but not by very much, so if other factors are positive there is a good chance that you will soon be getting above 6% just because of the normal increases in the rent you can acheive for this property.

For example just say that the next year the rent goes up by 15% then you are receiving $345 per week. In which case your return would be 6%. From that point on you are in a very healthy financial position with this property.

(345 * 52) = $17,940 / $300,000 (times 100 to express as a percentage) = 6%

Expenses

In terms of analysing a real estate investment a percentage of purchase or advertised price as a factor to get a ball park figure for how much it will cost to own and run that property. The first thing to do is determine the interest cost per year by multiplying the advertised price by the interest rate you would be paying.

Then find the estimated running costs by multiplying the annual rent received by an expense factor, (you may need to ask your agent or another knowledgeable investor for what applies in your local area.

An example will make this much clearer:

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