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"Investment Analysis: Run the Numbers with this Free Model"



Multi family investment property analysis is simple as long as you have an easy-to-use model for this purpose. The model I use is presented right below (complete with sample data...woo-hoo!). All you need to do is recreate it in Excel or some other spreadsheet tool and start crunching the numbers!





Please note that this real estate investment analysis tool is designed to be used with an amortization table to figure out monthly investment loan payment scenarios. Click here for a good amortization calculator (just fill in 3 fields: mortgage amount, loan term, and interest rate).


MODEL OVERVIEW


This investment property analysis model can be used to:

  • Determine which properties work financially before seeing them, allowing you to limit physical inspections to only those that are hot prospects. Since this is a side gig, there is no sense or benefit in spending time looking at any property that can’t hold water financially.
  • Determine your minimum and maximum bid amounts (for example, you may be in the red if the duplex costs $180K, but if you could get it for $160K then your mortgage payment will be lower and perhaps the numbers work).


HOW TO RUN THE NUMBERS


Any investment property analysis tool worth its salt must be simple to use, and it doesn’t get much simpler than this. Just fill in all the property income and property expenses and subtract one from the other.

Most of the numbers you’ll need to conduct the real estate investment analysis will be available within the listing itself. If not, then you can ask your real estate agent to call the seller’s agent and ask the pertinent questions.

Eventually, as you learn more and more about your target area, you will be able to make assumptions about missing numbers without having to ask your agent to track them down (for example, the average market rent for 1, 2, or 3 bedroom apartments).


Step-by-step investment property analysis instructions:

  • Plug in the monthly rental income from the MLS listing (add together the rents for each unit to derive the total)
  • Multiply the monthly rental income by 95% (to account for a 5% vacancy rate) to calculate your net monthly rental income
  • Plug in the expense items from the MLS listing (property taxes, water / sewer, utilities)
  • Plug in the expense items not depicted within the MLS listing (building insurance, mortgage payment, secondary financing payment)
  • Subtract monthly expenses from monthly revenue to get monthly profit / cash flow.
  • If monthly cash flow is positive, even by just a teeny tiny bit, schedule an appointment to go take a look at the property.
  • If the numbers show a monthly loss, calculate different mortgage scenarios to see if the property makes sense at a reduced price...if so, schedule it.
  • If the numbers just refuse to work, you can conclude that the rental property in question is simply not a good investment and move on to the next opportunity.

Importantly, it pays to be conservative in your investment property analysis assumptions. In other words, apply a vacancy factor to rental income, and slightly inflate the expense items. If the property looks good using “worst-case scenario” assumptions, then chances are you’ve found a winner (at least from a numbers perspective).

You will find that eventually you will learn what ballpark price points make sense before you even plug in any numbers. For example, in my target area I know that in most cases I can’t pay more than $160K for a duplex, $200K for a triplex or $225K for a quad. Because it is now second nature for me, I can pretty much look at the listing and tell right off the bat whether it makes sense financially or not.


BEYOND THE NUMBERS


Of course, any investment property analysis starts with the numbers, but it certainly doesn’t end there. View the model as a means to develop short-lists of multifamily rental properties to physically inspect with your agent. Then review the guidelines on my property valuation page for instructions on how to determine true value.



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12 Responses to Investment Analysis: Run the Numbers with this Free Model

  1. GodOfWar says:

    That is my kind of investment analysis…nice and simple! The only thing I might change is the vacancy rate, as 10% seems more realistic to me. But other than that, nice work!

  2. Donna S. says:

    Nice work! Great job simplifying the cash flow analysis activities. I was kind of scared to jump ionto the market, but this model is so easy to do that it boosts my confidence. Thanks again.

  3. danyel says:

    Good info as usual, but I must agree with GodofWar (great handle, BTW!). I think a 10% vacancy rate is probably more in line with today’s market. Anyways, the idea is to be conservative so I think it’d be better to assume 10% vs. 5%. Just my 2 cents…

  4. Kelli says:

    So are you saying as long as you have a small positive at the end of the worksheet, it is ok to move forward? When I run numbers, I get a small positive (we are conservative in our estimating.) But I’ve not been sure if that is enough to move ahead or it should be a higher profit?
    Thanks,
    Kelli

    • alank856 says:

      Hi Kelli, thanks for checking out my site! Yes that is exactly what I am saying. A small net positive each month is enough to move forward. You must remember that this is a long term strategy, and so your cash flow position will gradually improve over time as you slowly increase your rents as you go. Plus, you will get all kinds of tax benefits that do not show up on the worksheet, the sum of which represents incremental income due to a lower overall tax liability. And finally, if you’re following my strategy, your tenants will be funding the accumulated equity you will get in the property over time, so when you sell, your mortgage will be much lower and typically the property will have appreciated so you’ll get a bit of a windfall at that time. So for all these reasons, I’d say if it’s a decent property in a decent area, and you can show a small monthly net positive in cash flow each month, then move forward. Good luck!

  5. bas says:

    Thank you for providing many tips and encouragement. They strengthen my resolve when I feel nervous or in limbo wondering if I made the right decision diving deeper into this business. When I started, I lacked guidance but the numbers made sense to me.
    I really appreciate it.

  6. Ally says:

    Thank you sooo much for this site. I’m a young professional and my fiancé and I wanted our first home to be a 2-4 unit where we live in one of the units. I have literally read almost every post at least twice. I did not intend to so closely follow the site but as the different decisions came up in this process I always had your information in mind. It turned out to be great advice and helped me make smart decisions so far! We are about to close on a propert now (4unit) and I knew there was a post on cash-flow analysis and how even a minimal amount is ok so that is how I got to re-reading this article. I just had to post how much I appreciate your info since we are making it a reality soon! Thank you and hopefully everything will workout for us as well 🙂

    • alank856 says:

      Thank you for your kind words! Good luck!

      Alan

  7. Ally says:

    Hey Alan – Do you have any thoughts or opinions on buying a rental property and living in one of the units for a few years. Assuming that it is still a long term investment like you say… I am buying a four unit and living in one of the units. Its in an area I like and I am just getting married and thought we can live in the units since its all the space we need. (lower middle class area of a middle class immigrant neighborhood close to my job and where I grew up). Based on how much I learned from your previous posts I would love to hear your thoughts.

  8. sven says:

    @Ally and all else… If you have found success with your current property, RINSE and REPEAT! The exception being, you re-finance the property you are in now ONLY(no car, bling, furs or other nonsense) to fund the down payment and closing costs for the next one. Keep repeating until you reach YOUR goals.

    Good luck to all.
    Sven

  9. sven says:

    Ally, you will get a better loan rate being an owner-occupant. YOU have to decide whether its worth being onsite or not.

    Good Luck,
    sven

  10. BT says:

    If your loan is conforming, the differential is only 50 bps or so. I would use a vacancy assumption closer to 15%. Not only does it take time to turnover units, but it takes time to evict deadbeat tenants and recovery rates are typically pretty low.

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