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How to analyze a rental property ?

In this month's article, I will explain how to analyze a rental property.

An investment property analysis helps you to determine whether you should invest in the property or not.

Single-family and multi-unit properties and commercial real estate use different metrics to evaluate an investment decision. In this article, we solely use the metrics for Single-family properties.

The main factors you should look at when analyzing a rental property are Cashflow and Appreciation.


  • Cash flow = the difference between income and expenses.

  • Income – Expenses = Cash flow

  • Appreciation = Real Estate appreciation is the increase in the value of a home property over time.



Location

Real Estate is all about location. Location is one of the most determining factors in affordability, demand, and availability. Understanding the location you are investing in is key to being successful with that investment.


Rental income

How to calculate your rental income?

Each property varies in size, rent out furnished or unfurnished and some locations are better than others.

The best way to determine the rental price is by looking at comparable rentals in your area. Start by doing your due diligence by looking at the available rental properties in the same area. The comparable properties must be truly similar. One-bedroom apartments have different rates than a 3-bedroom apartment.

A good way to figure out the rental income is to look at 5-10 comparable objects and calculate the median rental price.

If your property is newly renovated, it's a good reason to aim for a higher rental price.


Expenses

To analyze the property, you will need to make assumptions about your expenses. The 50% rule is a simple assumption that 50% of your rental income will go towards operating expenses, not including mortgage principal and interest payments.

Here is a list of expenses that you must take into consideration:


  • Taxes

  • Maintenance

  • Vacancy

  • Capital Expenditures

  • Property management

  • Insurance

  • Homeowners' association fees

  • Rental fees

  • Turnover costs

  • Utilities (if applicable)

  • Legal accounting

  • Reserve



Breakdown in fees:


  • Taxes & insurance: 5% (The percentage depends on the taxation of the country you're investing in)

  • Maintenance 5%-15% (Depending on the condition and age of the property)

  • Vacancy 3-10% (High or low demand for rentals)

  • Capital Expenditures 5%-10% (Depending on the condition and age of the property)

  • Property management 6-25% (Long-term rental, short-term, or AIRBN the type of rental you have partially decides what commission you have to pay)

  • Reserve 3%

  • Legal accounting 5%

  • Utilities 2-5% (I recommended it to pass it on directly to your tenants)



How to estimate the Rental expenses on a rental property?


  • Call the companies or government institutions that are issuing the expenses.

  • Ask local property managers: Most property managers would share this information with you as they would like to have you as a new client.

  • Ask other investors or homeowners: Look for someone that is living or investing in the area you are interested in.

  • Real Estate agent: look for an investor-friendly Real Estate agent. He or she can help you analyze a rental property.

  • You can ask for the real expense list from the current owner/seller



Analyzing a property:

The following numbers are not made up. These are actual estimations on two properties that I have researched in the city center of Barcelona.

To save time and effort I use the rental income calculator on Biggerpockets. On Biggerpockets you get the first 5 calculations for free then you must pay for a pro membership. If you type in google rental property calculator you will find plenty of free options as well.


So, what information do you need to fill in?


  • Purchase price

  • Closings costs

  • Rehab costs (If applicable) + ARV (After repair value)

  • Loan details: terms, period, Loan to value

  • Rental income

  • Expenses (see list above)



Terms:


  • ROI: Return on investment

  • Cash on Cash ROI: Cash-on-cash return for real estate investors measures the amount of net cash flow a property is generating as a percentage of the total amount of cash invested.

  • NOI: Net operating income is a real estate term representing a property's gross operating income, minus its operating expenses.

  • Cap Rate: The definition of cap rate is the annual return from operations that an investor would expect to receive for a certain asset in a specific market at the current time if the asset were to be purchased for all cash.

  • The most widely used cap rate formula is simple: Cap Rate = Net Operating Income (NOI) / Current Market Value



Annual growth assumptions:

My advice would be just to be conservative and assume the same low growth rate for each number of 2% rent and 2% expense. There will be periods of higher and lower inflation but since I'm a long-term buy-and-hold investor in the long run this should play out close enough to reality.

Markets can change significantly in 25 to 30 years. Long-term projections need to look at factors such as migration patterns, job growth, what are taxes like in the market, and where they might go in the future.


Property number 1:

The city center of Barcelona:


  • 6-bedroom apartment

  • Listing price 450k

  • Offer price 390k

  • Average room rental price €520 x 6 = €3150 monthly rent

  • Closing costs of 12.5 % include tax, agent fees, and notary costs.

  • Loan to value 70%

  • 30 years fixed interest rate of 3%

  • Cash on Cash ROI 8.62%

  • Monthly cash flow 1191,02






Property number 2:

The city center of Barcelona Tourist rental apartment:


  • 5-bedroom apartment

  • Listing price 690k

  • Offer price 620k

  • Expected yearly revenue 120k. I looked up similar properties on AIRDNA and AIRBNB to see what the Average daily rents are and the occupancy rate.

  • Closing costs of 12.5 % include tax, agent fees, and notary costs.

  • Loan to value 70%

  • 30 years fixed interest rate of 3%

  • Cash on Cash ROI: 23.84%

  • Monthly cash flow 6228

  • I used a higher appreciation number because I believe short-term rentals will be an even more desirable asset. Also In Barcelona, the local government doesn't give any new licenses away.







ROI

Property number one has an ROI of 8.62% and property number two has an ROI of 23.84% but comes with more risk as it’s a short-term rental.

A good ROI for a rental property is usually above 10%, but 5% to 10% is also an acceptable range. There is no right or wrong answer when it comes to calculating the ROI. Different investors take different levels of risk.

I highly recommend reading 'The Book on Rental Property Investing "written by Brandon Turner.

The book describes from a-z what you need to know to kickstart your Real Estate investing career.


What can I do for you?

Real estate has both the stability and the profitability to be a great foundation for building wealth. Whether you are new or experienced in real estate investment, I can help you with making a personalized investment plan to reach your goals. My expertise lies in finding great deals in Barcelona and its surroundings.

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