How To Analyze Rental Properties (Real Estate) In Under 10 Minutes (Quick and Easy Way)

finance Jul 15, 2022

Let's discuss how to analyze rental properties and real estate in under 10 minutes the quick and easy way with 5 simple steps.

Knowing these steps will help you determine EXACTLY what properties you should buy and which you should avoid.

What I learned early on in my investing career is that not all real estate is a good investment. 

In fact, investing in a bad property can really set you back financially. So it's important to pick the right properties.

We will go over:

  • step by step strategies I use to assess rental properties
  • how to assess real estate cash flow
  • how to tell if a property is a good rental investment to build passive income- remember not all real estate is a good investment

 

Step 1. Determine Down Payment For Investment Property

Unless you are paying cash you will need a down payment for a loan.

How much you need for a down payment on a house depends on the lender but generally it's 20-30%.

The average being 20%.

If the property is $200,000 then

$200,000 * 0.2 = $40,000 down payment needed (if it's 20% down payment)

Be sure to have a strong understanding of your market and what a competitive price is for a house.

You truly make your money on the purchase of the property and buying it under value.

Look for houses with undervalued prices or wedge deals

Wedge deals are properties that needed light cosmetic renovation, but by doing so it adds lots of value to the home and provides more equity to you.

 

Step 2. Calculate Total Rent / Revenue

To determine if this property is a good investment we need to calculate cash flow. 

Cash flow is how much is coming in (income) versus going out (expenses).

When investing in real estate you always want to be cash flow positive.

The first part of assessing for cash flow is to determine how much potential rent or total revenue you will get with the property.

Do some market research on competitive prices for that type of home or apartment unit

Look at sites such as

  • zillow
  • apartments.com
  • hotpads
  • craigslist
  • redfin
  • any other apartment or homes for rent pages

In some cases the property description will say how much you can rent the house out for if it's currently being used as a rental or is an apartment.

 

Step 3. Calculate Mortgage Payment

Once you have a strong estimation of how much you will be able to rent your place out for, the next step is to calculate the mortgage payment.

There are many online mortgage payment calculators you can use.

For example, Bankrate has a great mortgage payment calculator here

Or you can just type in Google "Mortgage Payment Calculator" and one will pop up.

Be sure to check current home loan rates and note that your loan rate will depend on various factors such as your credit score, how much down, and which lender you are using

 

Step 4. Calculate Cash Flow / Subtract Expenses

Now that we know the total rents that can be collected and the cost of the mortgage, it's time to assess the rest of the cash flow.

Understanding the cash flow of a property is a must to determine if the property is actually a good deal or not.

Here's common expenses to account for:

  • property taxes
  • property insurance
  • vacancy rate
  • capital expenditure
  • maintenance cost
  • property management
  • etc.

Property taxes can be found with the listing (at times) or you can ask your agent. They are also public record and can be looked up.

When it comes to property insurance, that is something you can typically inquire about by calling a local property insurance company.

Capital expenditure is the amount of money you need to allocate towards updating and keeping the place looking good. The amount for this varies depending on age and condition of the property but I like to use 10% of collected rents as a generic estimation.

Maintenance is often confused with capital expenditure. Capital expenditure is more about upgrades to the property and also varies depending on the property itself but I use an average of 10%

Step 5. Calculate Return On Investment (ROI)

One of the most common and important questions investors will ask is "when will I get my money back?"

Calculating your return on investment is important to determine if you feel it's a good deal of not.

To calculate your return on investment you must take how much income you will receive from your investment and divide by your total amount invested

HOW TO CALCULATE RETURN ON INVESTMENT

$20,000 invested

$5,000 / year income from investment

$5,000 / $20,000 = 0.25 *100 = 25% return on investment

 

So what is a good return on investment for real estate?

That all depends on the markets you are investing in.

Really competitive and large markets like LA , NY, San Francisco, Miami, Chicago, etc will typically have lower return on investments for cash flow

In large competitive markets you can expect 5-8% return on investment

In smaller less competitive markets it's not uncommon to see 8-15% return on investments

In general though this is how I break down return on investment

0-4% = Low return on investment

5-7% = Average Return

7-10% = Good Return

10%+ = Great Deal

 

There you have it. That is how you start assessing investment properties to see if it's a good deal or not.

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