Succeed with Sound Real Estate Analysis (Part 1.)
There is no dispute to this, real estate Investing is about numbers. If you do not like dealing with numbers and this is something you are not interested stop reading and find something else to invest in. There is nothing quite as powerful as real estate but a key to success in real estate investment is leaning how to analyze a deal and how the asset fits your needs. If you care enough, read on.
Numbers are at the heart at of real estate investing and connect to the four critical elements that surround income property investments including,
- Cash Flow – The net spendable cash generated from an income producing property
- Appreciation – The increase in value of a real estate asset over time.
- Loan Amortization – The pay down of debt over time.
- Tax Benefits /Tax Shelter – The effect of deducting depreciation and loan interest against taxable income.
To be successful in real estate you have to know the market numbers. Your specific deal has unique combination of vitals. These numbers include but aren’t limited to the following questions.
Property Analysis – Cash flow and Appreciation
- The sale price?
- The market comparable values?
- Price appreciation history – for this house and this neighborhood?
- Market rental comparables?
- The number of days on market?
- The income capitalization rates?
- The current vacancy rates?
- Are rental concessions being offered to win renters?
- The average expenses per square foot?
- The expense ratios for the property?
- The current property tax rates?
- What does insurance cost?
- Any loan terms?
- Loan origination costs?
- Interest rates?
- Amortization tables?
Tax and Depreciation Accounting Benefits
- Depreciation rules?
- Any recapture provisions if sold before depreciation schedules run?
- Ordinary income tax rates?
- Capital gains tax rates, as well as
- Passive loss rules?
This series of blogs will give background information so that you can become a more thoughtful and successful real estate investor. This will provide a background on how to choose a market and perform cash flow analysis of a specific property. Understanding and using these numbers will greatly improve your chance of success dramatically, even though you may be working with a trusted third party to help you.
A particular attractive aspect of real estate investment is the knowledge that one can have a reasonable expectation of returns. This is not so assured of the stocks, bonds and funds that can be traded on exchanges.
Once you learn the numbers, relationships and processes, you will see how easy this can be. If you are committed to succeeding in real estate investing the tools to learn can be a pencil and paper, spreadsheets or sophisticated financial software programs. Whichever path you take or tool you use, make sure you know how to use it. Developing an understanding of real estate analysis is vital. Investors are sheep to the slaughter without understanding and putting these basic principles into use. Don’t be a sheep. 2020 REI Companies can help.
Author’s note: This blog is inspired by a set of investor accounting standards the author developed with Carter Froelich, CPA, publisher of “The Property Ledger.”
Part 2. DO YOU CARE ENOUGH TO MAKE MONEY? Succeed with Sound Real Estate Partners (Part 2.)