Analyzing an Investment Property

The real estate market is huge in the United States right now. Almost anywhere you go, you will hear about the appreciation in investment properties and the great equity owners have built in their real estate investments. Make no mistake, a good investment property can make you a very wealthy person. Let’s take a look at some important things that should be considered when considering and analyzing an investment property.

1. Risk – No investment property comes without risk. Businessmen inherently understand that the most profitable investments are typically accompanied by the highest amounts of risk. There is a common belief that real estate is continuously appreciating. This is just not true. When there are downturns in the economy the value of your investment property will suffer. Over the long run the value of your investment property will likely return and even exceed its previous state. When you invest in real estate property you take a real risk by exposing yourself to the health of the economy. Investment properties also pose liquidity risks. Should you need to sell your property for financial reasons, you will have to take whatever price you can get. That price may not always be favorable, and even if it is it may still take quite awhile to sell it.

2. Cash Flow – Once you have analyzed the risk of investing in real estate and have decided to forge ahead, you will then want to analyze the cash flows of the investment. For example, if your investment property is an apartment complex you need to examine the revenues and expenses associated with ownership. How much revenue can you expect each month from monthly rental payments? What is the monthly mortgage payment on the apartment complex? Hopefully, the difference between these two streams of cash results in a positive cash flow. Once you have determined the annual net cash flow from the project you would be wise to discount these streams of income back to the present value. A positive net present value offers a good representation of the current value of the investment and will assist you in deciding whether to take ownership of the investment property.

3. Exit Value – In all likelihood, your plan with this investment property is to sell if off after a certain number years, say 10. In the final year of ownership of the investment property you will experience one very large cash flow due to the sale of the property. Determining the expected value of the investment property will also help you decide if this property is worthy of your investment. The sale of the investment property will allow you to cash in on the equity you have built over the years.

After performing this analysis you will have a better idea whether this investment property is worth your time. If it provides strong net cash flow from monthly rental payments and the sale of the property at the end of the investment term represents a substantial increase in value, then you would do well to consider the investment property .

Adam Smith is an informational author for 10X Marketing. For more information on commercial real estate lending can SNCLoans.com.