How can you analyze a real estate investment?
The three calculations most investors use are:
- Net Operating Income – which measures a properties ability to generate income
- Cap Rate – which compares that income generating ability to the price. (You can also use it to determine approximate value, but be careful!)
- Cash on Cash Return – which is really a projects return on investment (ROI): projected cash flows and mortgage paydown compared to the initial investment.
When I look at an investment potential I also like to look at:
- Cash Flow – Just the monthly cash flow the project will generate
- Cash Flow ROI – how that cash flow compares to the initial investment
- 5 Year Total ROI – how the cash flow, mortgage paydown and potential market appreciation compare to the initial investment
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