Suppose you are considering 10 potential properties and you would like to know which is likely to be the best performer. There are some standard performance factors that are used by many investors. The exact method these factors are calculated may differ slightly from investor to investor but as long as you use the same method for all properties it should be ok. Remember, no matter what the numbers say you must use common sense. For example, buying a property backing up to a busy highway is not going to get the same rent as a similar property a 1,000ft further away from the highway. No calculation will tell you this. There are other methods that will provide this information and I teach my clients how to do this.

What are the key analytics I use to compare similar properties?

• C/C ( Cash on Cash) = (Gross Yearly Income)/(Total Cash Invested)
• NOI (Net Operating Income) = (Gross Yearly Income) – (Operating Expenses)
• IRR (Internal Rate of Return) = This calculation effectively converts the Total Cash Invested and Gross Yearly Income into a cash flow like what you would expect to receive from other investments that pay a return based on an initial investment. A savings account at a bank would be an example of such an investment.
• PPSqFt (Price per square foot) = (Asking Price)/(Living Space)
• Rent/SqFt (rent per square foot) = (Estimated Monthly Rent)/(Living Space)

Notes:

• Gross Yearly Income - the annual rent (monthly rent x 12) before taxes. Some people subtract an estimated vacancy rate; on single unit properties I don't since I am only using the calculation for comparing properties not estimate my return.
• Total Cash Invested - The sum of: purchase price + closing costs + rehab costs. Basically, all your first year costs necessary to put the property into production.
• Operating Expenses are all the costs incurred during the operation and maintenance of a property. They include repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc. It does not include: principal and interest, capital expenditures, depreciation, income taxes or amortization of loan points. Basically, everything but the loan.
• Asking Price - The list (or advertised) price of the property. I use the asking price on the calculations since it is a "worst case" number. I prefer to provide conservative calculations.
• Estimated Monthly Rent - I estimate the monthly rent based on similar recently rented similar properties in close proximity. Ideally within the same subdivision or complex.
• Living Space - The living space is the square feet specified in the listing. This includes all heated and cooled areas within the property. It does not include a garage or similar areas.

Here is an example:

Once you have these numbers for all the properties you are considering, you can easily compare them and, tempered by common sense, typically go with the best performing property.

Lets look at the process for calculating NOI and C/C:

So, while the process is relatively easy, calculating the critical numbers for more than a few properties would be very time consuming. Now consider that you may need to run the numbers on hundreds or even thousands of properties and you will understand why it is hard for people to select the best deals even if they know the process. This why I wrote software that performs this analysis. My software can evaluate thousands of properties and provide a list of only the best. Below is a an abbreviated sample of what my software produces.

I wrote about 25,000 lines of software to create the kind of investment information that I need when I am making decisions. I provide this information and much more to my clients.

Call me today for your real estate investment needs, you will be glad you did.

Eric Fernwood
702-358-8884
EricFernwood@Gmail.com