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| Analyzing Rental Property Investments |
In the paragraphs that follow, I describe a method that everyone can use, the income capitalization rate. But there's another, even better way to analyze real estate investments-and that way is by using a discounted cash flow analysis that calculates very precisely how good (or bad) a potential real estate investment really is.
Note: I describe how to do discounted cash flow analysis in "Appendix A, Using Discounted Cash Flow Analysis for Real Estate Investments" of the ebook (available for download for $10.95) and also provide a Microsoft Excel workbook with the e-book download which you will need to do the discounted cash flow analysis.
But back the discussion of the simpler analytical approach, the income capitalization rate...
With an income capitalization rate, you estimate the net income generated by a property, express this net income as a percentage of the property value, and then adjust for expected appreciation. This sounds complicated, but let's break the process down into five steps to show you how this all works:
- Step 1: Estimating Net Income of Short Sale Investment
- Step 2: Calculating Short Sale Property's Value
- Step 3: Estimating Cap Rate of Property
- Step 4: Determine Overall Property Rate of Return
- Step 5: Assessing Effect of Financial Leverage
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