How to Analyze an Investment Property

Wealth is accumulated through many different investment strategies, but over and over we hear stories about how real estate plays a significant role for affluent people.  Real estate pricing is at historically low levels and this creates an opportunity for buyers in today’s market who know what to look for when buying a property.

There are numerous ways to analyze the return an investor will get on a property.  Some of these include: cash on cash returns, cap rates, and current cash flows.  However, before delving into the financials on a property make sure to take a look at these key fundamentals: 
  1. Is the current rental rate at or near the market rate?  If not you won’t be able to re-lease the building and have the same return.
  2. Do the tenants pay expenses, including maintenance and taxes?  If taxes are paid by the landlord, find out if they will increase when the property tax is uncapped.
  3. Is this a prime location for this type of use?
  4. Is the current tenant financially solvent?
  5. Is there a reasonable amount of time left on the current lease or are the prospects good the tenant will renew?
If the answers to these questions are positive, then it is time to do a financial analysis.  CCIMs take extensive training and use sophisticated real estate spread sheets to help buyers determine the rate of return they will get on the investment.  This includes tailored analytics that factor in the investor’s tax bracket and the tax advantages of real estate investments.  A sophisticated commercial real estate agent will be able to determine an Internal Rate of Return specific to the individual buyer.  The analysis will factor in specifics such as the amount of the down payment, ability to obtain low interest rates, and the anticipated rental rates and vacancy rates of a property.  Determining the rate of return makes it possible to compare multiple properties that are available to purchase.

A similar analysis can be done to determine when to sell an investment property.  Often an investor is better off getting the equity out of a property owned for multiple years and putting it into something that is higher yielding and will capitalize on new depreciation schedule deductions.
-Dan Stiebel, CCIM
Dan Stiebel

Dan Stiebel

Associate Broker
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