Cheat Sheet: How to analyze potential Rental Property!

 

Looking at Rental Property: 

You now have decided that you will be a rental property investor! Now what? Read the information below. These are the things you will have to get good at and know like the back of your hand. Practice, Practive, Practice! You will become better at doing these calculations and you will feel comfortable analyzing properties! 

1. Set Goals (What Job will your rental property perform? Cash flow, appreciation and Equity over time?) 
2. Find a property to analyze 
3. Gather Info (rent and expenses (Estimate expenses at roughly 50% of gross rents). 
4. Create income Snap Shot 
     A. GMR - .5% rule or 1% rule 
     B. Cap Rate (NOI divided by total price ) 
     C. NiAF (Net Income after Financing) 
     D. Cash on Cash returns 
5. Study Comparable sales 
6. Create Equity Snap- Shot 
     A. Current discount (minus 10% to 30%  of market value)
     B. Potential Value increase (ARV or After Repair Value) 

Income Analysis

Income analysis helps investors evaluate the financial performance of a rental property. Here are the key metrics and formulas:


MetricFormulaExample Calculation
Gross Rent Multiplier (GRM)Total Purchase Price ÷ Annual Gross Rent$100,000 price ÷ $9,600 annual rent = 10.42 GRM

One Percent RuleMonthly Gross Rent ≥ 1% of Total Purchase Price$2,000 monthly rent ≥ 1% of $190,000 purchase price

Cap RateNet Operating Income ÷ Total Purchase Price$12,000 NOI ÷ $150,000 price = 8% cap rate

Net Operating Income (NOI)Gross Rental Income - Operating Expenses$20,000 gross rent - $8,000 expenses = $12,000 NOI

The 50% RuleEstimated NOI ≈ 50% of Gross Rental Income$20,000 gross rent x 50% = $10,000 estimated NOI

Net Income After Financing (NIAF)NOI - Financing Costs$12,000 NOI - $9,500 financing costs = $2,500 NIAF


Cash-on-Cash Return (ConC)Net Income After Financing ÷ Down Payment$2,500 NIAF ÷ $30,000 down payment = 8.3% ConC


Equity Analysis

Equity analysis focuses on the growth of ownership value in a property over time. Here are examples of how equity can increase:

  1. Discounted Purchase Price: Buying a property below its market value.

    • Example: Property value = $200,000, Purchase price = $180,000, Equity growth = $20,000.

  2. Forcing Appreciation/Adding Value: Increasing property value through improvements.

    • Example: Original value = $200,000, New value = $220,000, Equity growth = $20,000.

  3. Paying Down Principal Using Rental Income: Reducing mortgage balance with rental income.

    • Example: Principal balance = $150,000, Balance Year 10 = $100,000, Equity growth = $50,000.

  4. Passive Appreciation: Increase in property value due to market trends.

    • Example: Original price = $200,000, Price Year 10 = $250,000, Equity growth = $50,000.

These calculations and examples illustrate how investors can assess both the income potential and equity growth of a rental property, helping to make informed decisions in real estate investment.

Would you like to delve deeper into any specific aspect or calculation?

My name is Sebastian Marroquin and I have been a Realtor in Los Angeles County for 13 years. We help investors buy their first home and or their next home! Let me know if you would like to have a conversation about your goals! 

Our website is: https://oursangabrielvalley.com/about-us/

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