The Real Estate Investment Process - Framework

There is an old saying "Information is power"; too much and too little information can both adversely impact ones success or failure in real estate investments. On one hand too much information can become overwhelming and on the other hand the lack of it usually yields unpredictable results.

It is important to establish a framework to follow when investing in real estate; doing so allow investors measure results, thus containing risk in a systemic fashion. This approach establishes a process that can be emulated in subsequent investments.

1. Gather financial information for prospect properties:

Find the price, vacancy rate, expected monthly rent (for income producing properties only), and growth rate. Gather the aforementioned financial information for various properties; it is recommend looking at one hundred properties and gathering the information for all of them. Remember you are looking for exceptional deals, therefore the more properties you look at the better.

2. Gather expected expenses for each property:

Find the following expected expenses for all the properties: Insurance, taxes, repairs, advertising, accounting, homeowner association, management company, and others. It is OK to estimates the expected expenses, also keep in mind that not all expenses are applicable to all properties.

3. Gather financing information:

Contact numerous banks and lending institutions and gather the following information for their loan offerings: Interest rate, down payment percentage of property price, debt coverage ratio and loan to value ratio requirements. The more banks one talks to the better.

4. Calculate the financial indicators for each property:

Calculate the following financial indicators for each property: Gross Rent Multiplier, Cash on Cash Return, Profitability Index, Internal Rate of Return, Debt Coverage Ratio, Break Even Ratio, Loan to Value Ratio, Capitalization Rate, and Net Cash Flow. Calculate the indicators for each financing option obtained from the previous step to see which one yields the most profitable results. Calculating these indicators for each prospect property can be time consuming, it is best to use modern real estate investment software to perform this task.

5. Compare prospect properties:

Compare the results of the financial indicators calculated in the previous step for all the properties. The property with the most attractive indicator results should be the one to undertake as an investment. Comparing all properties manually can be tedious and time consuming; it is best to use real estate investment software to perform the comparisons.

Following the above steps when pursuing real estate investments will help identify the most profitable investments in a systemic fashion and eliminating emotions from getting in the way. Using real estate investment software to perform the heavy work automatically can mitigate the risk and timing involved in the calculations.