A No Nonsense Approach to Real Estate Investing: How to Quickly and Efficiently Analyze a Rental Pr

If you talk to most accountants or successful business owners and ask them what is one of the most tax efficient and successful investments they suggest and the answer will likely be real estate. Real estate offers many paths to financial freedom, but how do you find and decide if a specific property is a good investment? Today we will look at the real estate rental path and how to analyze a deal.

Location

You have heard it before and I will reiterate it again. Location, Location, Location! Any type of real estate investment you select will hinges on the location of the property. A fast and efficient way to narrow down a deal is to pick a few good locations and select a property within that area.

When I analyze a deal I will typically ask myself would I want a family member to liver here? Is this location safe? If my answer is yes, I know that is an area to look into. Nicer areas will command a higher purchase price but they should retain and command higher quality renters which will reduce vacancy loss.

Income vs. expenses

After you determine the area you want to buy a rental property begin to look at the income and expenses related to each property. Looking at both closely will allow you to determine how much cash flow potential each property has.

If you take the income the property can generate and subtract the expenses the amount left is your cash flow. Cash flow should be your first and only income source you look at. Some investors will factor in appreciation and tax efficiency. My suggestion is to only look at cash flow. If a property cash flows then appreciation and tax advantages are cherries on top.

Be sure to account for all expenses. Below is a list of typical expenses related to a rental property

1. Loan payment

2. Repairs and Maintenance

3. Property management

4. Taxes

5. Insurance

6. Utilities (if included in rent)

Vacancy

So you have the location and cash flow figured out. The last item to look at is vacancy. What is Vacancy? Vacancy is a term used for renter turnover or how often a unit is vacant. This is typically expressed as a percentage of the gross revenue.

Properties with a high vacancy rate can look be a money pit. Renter retention is a huge factor in making money in real estate. If you have a property that sits empty two or three months every year, you will not make money and likely lose money.

The best way to find out what each properties vacancy rate should be is to look at the last 2 years gross income and divide it by 24. This will give you the average monthly rental income. Compare this to the amount that is actually charged for the property each month. The difference between should be small if the vacancy rate is low.

As you can see the process can be quick and easy with the correct perimeters. So, are you ready to buy your first rental property?