R.E. Investment: How to analyze a "Buy and Hold" property

Good morning Friends,

Welcome to the next installment in the Investment Series, today we will be talking about how to analyze a Buy and Hold investment property. Simply because there are multiple types of investment properties to Buy and Hold the first step is to determine what type of properties you prefer, be it Single Family homes, Duplexes, Triplexes or Apartment buildings. Once that determination has been made then as you locate properties you want to find out the Gross Rental Income and the Monthly Expenses. You will need to know the monthly expenses to get the Net rent income, that's important info to determine the Cap Rate for the property.

The Cap Rate is the rate of rate of return you can expect a rental property to generate based on the net income produced. The formula is Net Operating Income (NOI)/Current Market Value = Cap Rate and its a great starting point for analyzing a rental income property. Let me be clear, it is not the only factor in determining the viability of a rental property. The condition of the property is a huge factor as well and maybe the biggest factor in my opinion because depending on the amount of work that has to be done it will have a big affect on the Net Operating Income. The condition of the property also affects how much you are able to rent the units for which affects the gross rent income which if you have a lower gross rent amount then you will have lower net operating income. 

Lastly, location is an important factor as well. As everyone knows location, location, location is how the saying goes. The location is important for two reasons, one being the overall value/appreciation of the property and the ability to rent. No one wants to live in a dangerous area or near steel mill or a garbage dump. Here's an example: Your looking at a 15 unit apartment building on the market for $1.5 million each unit rents for $750 per month and the monthly expenses are $4,250. 15 units x $750 = $11,250 (Gross Rent Income) subtract expenses of $4,250 equals $7,000 net income per month x 12 months equals $84,000 Annual Net Operating Income. $84,000 NOI divided by $1,500,000 = 0.056 or 5.6% based on the numbers this doesn't look like the most attractive investment. However, you know that property is poorly managed and the units are rented well below market value. So with better management you can increase rents $200 per month per unit which brings the Gross Monthly Rent Income to $14,250 after expenses you have $10,000 NOI x 12 months = $120,000/$1.5 Mil = 0.08 or 8%. 

Now you are looking at 8% ROI which I think is much better than what you would get with leaving your money in a savings account and a lot safer than putting it all in the Stock Market. Either way I hope this gives you better insight into how to analyze investment properties. If you have any questions you would like me to answer feel free to ask your questions in the comment area or you can contact me via email at james@thejohnsonrealtygroup.com

Happy Investing