Investment Properties - Analyzing Their Worth

By: Neil Galloway

When you are looking at properties it is often hard to decide what to look for. Establishing your own set of criteria is the best bet. No worries, its not set in stone. You can adjust them however you need as you learn more. But to determine if it is good or not you have to also know whats bad. You can do this by comparing to other ones that are bad.

When my wife and I were looking for our first house we had the following criteria:

  • It must have a suite for rental income

  • Separate laundries (a demand from the wife)

  • Enough available parking

  • Suitable interior in both living spaces
From this you can see a few things that were important to us. The financial return and suitable appeal to renters and ourselves.

Since then I have learned so much more about rental houses I am embarrassed at how much I did not know at the time. This will probably be even more true in another year.

Comparing Financials

This is the biggest thing I have learned to compare houses. You can look at a hundred houses without ever leaving your computer and doing a comparison of the financials on them. Create your own spreadsheet (or use mine in the full article) to punch in the numbers for each house you look at and see what type of returns you are looking at. There are two main components to house analysis. What will the cash flow be and what is the overall return.

Cash Flow

This is what cash will be coming in and out of your pocket every month. Rent cheques are the income and then your expenses are mortgage, insurance, utilities, maintenance costs, and any other services you provide.

It is important that you have decent cash flow. If it is negative by a lot, that means you will be paying out of your own pocket every month and this will be hard to sustain. Slight negative and even positive (you are making money) is a good sign.

Overall Return

This is composed of the cash flow, but also takes into account the appreciation/depreciation of the house value and the fact that part of your mortgage payment actually goes to the principle amount on the house (money you are actually retaining).

Positive return is a must otherwise you are wasting your time. You also want it to be reasonably high for the risk you are taking. Anything less than what you can get from the bank or other secure investments is too much risk for not enough reward.

Simple Analysis

This is a quick litmus test for any property you look at. Basically it takes into account the following:
  • Mortgage (expected interest rate and house value)

  • Rental Income

  • Expected House Appreciation

  • Expected Maintenance Costs (1% of the house value)

  • Taxes
You need to combine these values, adding income and subtracting expenses. It will give you a quick look at what kind of return you will be looking at.

There is a spreadsheet the can be downloaded from the full article How To Analyze an Investment Property.
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