Careful analysis of the numbers will lead to sound investments in real estate. So, what numbers should you analyze? We have developed a one-page investment property worksheet to assist you in running the numbers quickly.
At the end of this page, you can download our investment property worksheet, but first, let’s go over how it works. The worksheet is a Microsoft Excel file with editable fields. The green fields are ones you enter based on the property you are evaluating and the blue fields are automatically populated based on the numbers you enter in the green fields.
The worksheet has five sections. The final section will provide you with an estimate of your operating income to determine if this property works for you as an investment. The image below is a screenshot of a completed worksheet of an example three-unit property. This will give you an overview of how it’s organized.
Section 1 – Purchase
If you are financing the purchase, there are fields to complete to enter the loan amount, loan APR, years of the loan, and what the estimated monthly payments will be.
Section 2 – Initial Investment
You know the purchase amount and monthly payments, but it’s important to understand how much you will need out-of-pocket at closing. You will enter the percentage of your down payment, estimate any possible inspection fees, and appraisal fee. There is a field available for any other costs. In the end, you will have your total initial investment.
Section 3 – Monthly Income
In the third section, you enter what you expect to rent each unit for per month. There are fields for four units, but if you are looking at a property of five or more units, you can insert additional rows in the Excel file and copy/paste the row above. At the end, you will have the total estimated monthly income based on your assumptions.
Section 4 – Monthly Expenses
Now that you know the income possible from renting out this property, you need to understand your monthly expenses. In this section, you can set the percentages to estimate taxes, hazard insurance, and maintenance costs. Below these expenses are line items for possible expenses, such as water/sewer, property management, and pest control.
Section 5 – Valuation
Finally, the fifth section of the worksheet automatically populates based on the numbers in the previous sections. You will get numbers to help you determine the value of the property: capitalization rate, gross rent multiplier, monthly net operating income, annual net operating income, and monthly cash flow. These numbers will allow you to objectively evaluate a property’s investment potential.
Let’s look at each number, so we have a better understanding of what they mean.
– Return on Investment (ROI)
Return on investment measures how much profit is made from your investment as a percentage of the initial investment made to buy the property. To calculate return on investment, use the formula below:
Annual Net Operating Income / Total Initial Investment = ROI
– Capitalization Rate
Capitalization rate – or cap rate – is often used in determining the value of commercial real estate. However, it can be a helpful metric when evaluating a multi-family residential property. Cap rate represents the yield of real property over one year assuming the property is purchased using cash and not financed. To calculate the cap rate, use the formula below:
Annual Net Operating Income / Purchase Price = Cap Rate
– Gross Rent Multiplier (GRM)
One of the best ways to determine the current market value of a multi-family property is to calculate the gross rent multiplier – or GRM. It’s an income approach to evaluating value, which is better suited for multi-family properties than looking at comparable properties. To learn more about gross rent multiplier, check out our previous post. To calculate the GRM, use the formula below:
Purchase Price / Gross Annual Income = GRM
– Net Operating Income (NOI)
Net operating income describes net income after deducting the total operating expenses, such as utilities and maintenance. Learn more about NOI in our previous post. To calculate monthly NOI, use the formula below:
Monthly Income – Monthly Operating Expenses = Monthly NOI
– Monthly Cash Flow
Cash flow is a simple concept that is crucial to understand when investing in real estate. You want to find your profit after monthly expenses and loan payment. The goal is to have a positive cash flow, so you are earning income in addition to any appreciation of the property’s value. You can use your profit to pay down your loan, which helps you in several ways. To learn more about the concept of cash flow, check out the book, “Rich Dad, Poor Dad” by Robert Kiyosaki. It’s a must-read for anyone looking to increase their financial intelligence. To calculate monthly cash flow, use the formula below:
Monthly NOI – Monthly Loan Payment = Cash Flow
This worksheet is for informational purposes only. You must do your own due diligence before investing in real property. There are many factors in buying real estate. This worksheet is a preliminary assessment tool to begin your due diligence. Consult an expert during your due diligence and closing process. By clicking the link below to download the worksheet, you acknowledge you have read and understand this disclaimer.