5 Ways to Decide if an Investment Property will be Profitable

The fundamental factor you need to consider when purchasing investment property is return on investment (ROI). There’s little point in getting a really terrific deal on a piece of real estate, if you are not able to translate that deal into positive cash flow fairly quickly. Just because you acquired property at bargain basement prices does not always mean you made a sensible investment choice. Here, in no particular order, are five tips to figure out if an investment property will be profitable.

Cash on cash analysis

A quick way to verify if a property is worth its price is to consider the annual cash flow you are likely to generate from the property and divide it by the amount you will pay in cash to buy the property. For example, if you expect to have a cash flow of $1,000 each month from rent after all expenses, your annual cash flow from the property would be $12,000. If you put down $60,000 in cash to buy the property, your cash-to-cash or cash return ratio would be 20 percent, which is excellent.

Gross Rents Multiplier (GRM)

This is a quick and easy way to assess the value of a property. With this approach you first calculate the total amount of money you are likely to generate from rent each year, before taxes and other expenses. You then divide the market value of the property by this amount to calculate the GRM. If the property is valued at $100,000 and you expect to get $10,000 each year in rent the GRM value is 10 percent. If this number is similar to the GRM for other similar homes in the area, you probably have a good investment property on your hands.

Appreciation

This is a somewhat basic measure based on how much a property is likely to go up in value over the next several years. If properties in the area have a very high appreciation rate, you are probably making a safe investment. However, you still need to do a GRM and cash return analysis to make sure you are making the right decision.

Net present value and internal-rate-of return

Both of these are fairly complex investment measures and probably need to be handled by a qualified professional. Basically, both measures look at what your investment today would be worth in a few years. Typically, the higher the return, the better the investment.

Buying an investment real estate can be tricky. If you need help buying one, contact the investment professionals at Avis Lending.

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