The evaluation of a real estate property is simple:
This property is definitely not a good investment.
- Verify property income -> actual income
- Verify property expenses -> adjust saler numbers + include vacancy
- Determine net operating income (NOI) = income - expenses
- Calculate the loan payment and your profit
1) Verify the property income
There is 3 types of income:
- Actual income: what the property has generated in the last 3 months
- Actual potential income: total income that could have been generated if 100% occupied
- Future potential income: total income at today market rents.
Don't forget to consider vacancy (missing income due to vacancy).
2) Verify the property expenses
Concerning the expenses:
- Repairs and maintenance: it always increase (old = start higher)
- Insurance is a fast moving business and rates can vary widely
- Replacement reserve: suspicious if 0 (usually under-estimated)
3) Determine the NOI
- The larger is better but don't forget to include your loan payment ;)
- profit = NOI-loan payments
4) Find the capitalization rate and valuation
Capitalisation Rate = NOI / Purchase price
OR
Offer price = NOI / capitalization rate
capitalization rate = [7-12]
5) Calculate the loan payment and your profit cash on cash
profit = NOI - loan payments
cash on cash = profits / down payment
example:
saler price = 989K
income estimate = 3K*4 -> 12K
expenses estimate = 7.2K (just taxes)
NOI = 5K
Offer price = 5K/.08 = 62.5K
saler capitalisation rate = 62.5K/989K=0.06 -> not 0.08
What should be the income to justify this valuation = 0.8*989k=79K
This property is definitely not a good investment.
