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Try it out for free today! We get a lot of posts on the BiggerPockets forums asking about evaluating deals — everything from single family homes to large apartment complexes. Oftentimes, the posters and the readers of the posts have a reasonable understanding of the basic building blocks of a financial analysis, but all-too-often, I find myself and others reiterating some basic concepts around deal analysis.
While I love answering questions, I figured it would be easier to document the basic financial analysis process in one place, so that in the future, I can just refer readers here when they have basic questions. Below is a primer that I put together a couple years ago while I was learning the process of financial analysis; while this should by no means be considered a comprehensive review of the subject, it should serve as a good introduction for most readers.
To accompany this blog post, I created a free PDF poster you can download right now and print out. Avoid these 10 mistakes and get a great investment property! To get the PDF, just click the button below: One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties.
Well, BiggerPockets can help with that too. Are you curious about how you would go about analyzing the financial details of the property you are considering buying? How you would go about figuring out if the property were a good deal or rip-off?
The following is a detailed tutorial on how to do a thorough financial analysis of any multi-unit residential rental property you might be considering purchasing.
While this analysis will certainly work for single-family rentals in fact, this type of analysis will work for most investments, in generalthe market value of single family homes is generally determined differently than multi-family properties.
So, a single family investment home will generally rise in value if similar homes in the same area are rising in value, and lose value if similar homes in the area are losing value. The fact that multi-family properties are valued based on their income potential demonstrates how important good financial analysis of these properties is.
The goal is this document is to teach even the most novice real estate investor how to analyze the financial components of a rental property, but I expect more experienced investors will also find some good information in here.
In general, good financial analysis involves being able to input a bunch of information about your real estate investment into a financial model, and have that model kick out a bunch of information that you can then use to determine whether the investment is a good or a bad one and whether it is the right investment for you.
Below are the very high level inputs necessary to perform a thorough financial analysis of a residential rental property: This is information about the physical design of the property, including number of units, square footage, utility metering design, etc Purchase Information: These are the details of the loan you will obtain to finance the property.
This includes such things as total loan amount, downpayment amount, interest rate, closing costs, etc Income: This the detailed information about the income the property produces, such as rent payments Expenses: This is the detailed information about costs of maintaining the property, including such things as property taxes, insurance, maintenance, etc Getting good data out of your model requires that the information you put into your model is highly reliable and accurate; gathering accurate data can often prove the difference between making the property look great on paper and look horrible.
So, part of your job is to make sure you have the best information available when doing your financial analysis. How do you do that, you might ask? You should ask to see previous years tax returns, property tax bills, maintenance records, etc.
Remember, the seller is trying to make a sale, and will oftentimes get creative to make the numbers seem better than they are. In addition to getting actual data from the seller, you should do your best to ensure there are no surprises if you were to buy the place.
For example, when was the last time the property was assessed for taxes? Remember, even small changes to the income and expense numbers can mean big changes in your bottom line.
Where to find your data In terms of the input data we discussed above, here is where you should be looking for each of these: This information should be available from the seller, but more comprehensive and detailed information can also be obtained from your local County Records Office Purchase Information: Obviously the seller is going to name a purchase price which will likely be negotiable, of coursebut the more important information here will be any upfront maintenance or improvement work that needs to be completed to ensure that the property can or continue to meet its income potential.
You can also talk to the property management company currently running the property if there is one to get this information Expenses:For commercial and industrial properties under long-term leases, the impact of trend analysis is (for such items as real estate taxes, heat, electricity, water, insurance, normal maintenance including Financial Analysis of Real Property Investments Financial Analysis of Real Property Investments 9.
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