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

Multifamily 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!

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 revenue and expense items 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 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 (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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