Class On How To Prepare A Statement Of Cash Flows Analyzing Your Prospective Real Estate Investment From Top to Bottom

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Analyzing Your Prospective Real Estate Investment From Top to Bottom

If you are a discerning real estate investor, and we assume you are, after you find your future investment property, you need to analyze it carefully and thoroughly. You should check all the details of the property, especially the income and expenses shown by the seller. You should never just rely on what you hear.

Develop a property analysis that includes reports such as APOD, pro forma income statement and rent roll. In addition to helping you make a wise investment decision, these types of property analysis reports also serve as reminders for items you want to know such as unit type, property age, rent breakdown per unit, cost items, lot size characteristics, properties and locations etc. You can help with this with a real estate investment software solution.

Analyze a potential real estate investment using the following list of different phases. If, after initial analysis, a rental property does not seem to make financial sense, perhaps changing one or more will improve the financial picture and make the property a good real estate investment.

1) Income: Can rents increase and can they increase soon after purchasing the property? Would changing the type of tenant in the building allow for higher rents, perhaps incomes are suffering due to poor or non-existent management? Can the building be used in some other way to increase income, such as a motel or small offices? Make sure the local zone allows all the proposed changes. Is it reasonable to infer that the property has the potential to provide other income, such as a laundromat, garages or storage?

2) Costs: Take a close look at operating costs to see if any are excessive. If they are, is it reasonable to think you can lower them? Of course, you can’t control all costs, but you can save some money if you plan to maintain and repair your lawn yourself.

3) Financing: You can adjust the ROI simply by using different financing techniques. While one type of finance package can make your future real estate investment look unprofitable, another finance package can just as easily turn your future property into a good and profitable investment. Try different financing options to see how a mortgage affects your cash flow, rate of return and profitability.

4) Cash Flow: Don’t just consider the pre-tax cash flow generated by an investment property to determine your overall benefits. Take a look at your after-tax cash flow and find out what your property will give you as an after-tax return. It is always best to consider tax shelter items such as paper loss that the IRS allows for depreciation (reimbursement). Again, good real estate investment software can do this calculation for you in seconds, so it doesn’t have to be difficult.

5) Price: Some rental properties, regardless of other factors, simply won’t make sense unless the seller is willing to accept a lower price. If you want to increase your chances of success, don’t just throw the number away. If the seller gets the impression that your numbers have no reason, they will be less willing to discuss the price with you. Adjust the price in advance to see its impact on cash flow and rates of return. Then choose the price based on the most favorable rates of return. Prepare these numbers and discuss them with the seller. You may be surprised to discover a salesperson willing to listen to reason.

The bottom line is that the numbers have to make sense. Never decide to buy an investment property based on the aesthetic beauty of the building or a simple rule of thumb to determine its value. Remember that only women are beautiful, real estate investing is all about the numbers.

Take the time to prepare a property analysis. This is the only reasonably certain way of making a sound investment decision on any future real estate investment. If your real estate analysis shows that the property doesn’t make financial sense, forget how beautiful it can be and don’t buy it!

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