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How to evaluate a real estate deal
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Leftyqb15
RealEstatePro Answered question
What makes that investment a good deal is a question that really starts with what you are seeking when you invest in an apartment complex. Is this for long term? Are you seeking monthly cash flow? What are you happy making on your money on an annual basis? As John mentioned, you need to be able to have contingency money for repairs, taxes, ongoing maintenance and of course vacancies. You want to determine your CAP rate and that will give you an idea of your ROI. You’ll need the current owners tax rolls, other income (like possibly laundry), expenses and also you need to know how long the current leases are and are they at market rent or below. If they are below and the lease are up soon, that could give you an opportunity to raise rents and therefore increase your return. To determine the cap rate calculate the yearly gross income of the investment property. The gross income of a piece of investment property will mainly be in terms of rent rolls. Subtract the operating expenses associated with the property from the gross income and then divide the net income by the property’s purchase price.
RealEstatePro Answered question
On real estate you make money when you buy… meaning that you have to negotiate hard and get the best possible deal, if you don’t buy below market, it will be hard to make a profit on a re-sell or rent. In terms of rent, have the estimated cashflows cover maintenance, taxes, interests, fixes (every time you change tenants as people tend to destroy stuff), as well as give yourself a good 3 or 4 months (and I’ve seen even longer) of the possibility of having your property vacant, and if after all that the return is projected to be greater than what you can get in other kinds of investments, I would suggest to go for it, if not, don’t. On real estate people tend to buy with the “heart” but if its not going to be your family home and its only an investment, think with your “brain” and don’t “fall in love” with any property because thats how many folks lose money. Good luck!
John P Trainor Answered question
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