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Determining Property Profitability |
There are four main factors that indicate whether or not a rental property is a good deal: the income it produces, the location, the available financing and the fair market value of the property relative to the purchase price.
You can obtain the information necessary for determining the income a property produces by asking the following questions. When you call the seller, try not to ask questions in which the seller has already supplied the answers to in his ad or questions in which the answer is obvious.
* What is the asking price for the property?
* What is the gross scheduled rent for each unit per month?
* What are the annual property taxes?
* What is the property's annual cost for insurance?
* What utilities are paid by the landlord and what do they total annually?
* What are the annual lawn and snow removal costs?
* Any other expenses?
* Does the property use gas or electric heat?
* Are there washer and dryer hookups in each unit or a tenant laundry facility?
* What appliances are included in the sale?
* Does the property currently have any vacancies?
* How long have you been trying to sell the property?
After obtaining the seller's answers to the Property Questionnaire, you can organize and analyze the information.
Gross Income: Add the scheduled or expected rents and all other expected income to determine the Gross Scheduled Income (GSI). Then subtract the vacancy allowance or expected vacancy, taken from the current vacancy rate for the area, to arrive at the Gross Effective Income (GEI).
Expenses: Here, determine the total Operating Expenses (OE) by adding all the expenses involved in the operation of the property not including any debt service.
Net Operating Income: The Net Operating Income (NOI) is the difference between the Gross Effective Income and the Operating Expenses.
Debt Service: Debt Service (DS) is the total principal and interest payments for all the mortgages or loans used to acquire the property.
Cash Flow: The property's Cash Flow or Net Income (NI) is the Net Operating Income less the total Debt Service (DS). This can be a positive or negative number.
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