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The First Real Estate Analysis You Should Run

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Jason Chan
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Why you should look into real estate investing

Real estate investing is one of the most common ways to build wealth in the US. And depending on which list you’re looking at, it is often one of the top industries that creates millionaires.

Real estate investment spreadsheet

Figuring out if a real estate deal is worth it or not is the first step in investing. Here is a simple model for analyzing real estate investments: https://subset.so/templates/quick-real-estate-deal-calculator

The model gives you a ball park estimate of your expected return, using the inputs that actually affect the investment’s return. We are look for something that’s greater than 6% return on our equity. This is generally considered a good baseline return on these types of investments. You can use this spreadsheet to weed out bad deals and not waste time on deals that will never make sense. To figure out if a deal is truly good, you will have to do more in depth analysis. So this is a starting point.

Cash flowing properties

This model only works if you are looking for real estate investments from a cash flow perspective, or properties that you plan on renting out and provide income every month. It does not really work if you are making this investment from a tax perspective or if you are speculating on real estate appreciation. You’ll also notice that I don’t really consider the tax advantages of owning a home or the equity that you are building by making mortgage payments into my calculation.

I’m only evaluating the deal based on what I know in the short term. I don’t like to speculate on the real estate market and what I could sell the house for in the house for in the far future, which can changes how much my equity is worth, nor do I want to speculate what tax benefits exist for landlords each year. If you really wanted to, you could just add your principal pay down to your cash flow. Secondly, the analysis becomes way more complex when you have to account for these things. As the first piece of analysis that I do, I just exclude it in my math, take a mental note of it, and make a decision.

Metrics that matter

There are really only 5 metrics that matter for an initial screening. The purchase price, your down payment, the interest rate, income and your expenses. With these things, you can get a pretty good ball-park of what your Rate of Return and Cap Rate is.

  1. Purchase price
  2. Down payment
  3. Interest Rate
  4. Income
  5. Expenses
  6. Return on equity

These metrics are pretty self explanatory, but they can change the outcome of your investment drastically so it is best to make your best educated guess. If you don’t know the answer, try to come up with a conservative answer. The beauty of it being a spreadsheet also means you can plug in a bunch of different inputs quickly to see what numbers might make the deal make sense.

As with any type of investing, there are inherent risks, and you should seek advice from a licensed financial professional. This is not financial advice. This post is intended to teach you about the basics of financial modeling for real estate investing. Our hope is that you get a better idea of the kind of math involved with investment calculations.