Real Estate Investing Basics

Income Real Estate Investors: Learn How to Analyze a Property before you Get Burned!

Expertise: Real Estate Marketing, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing, Real Estate Investing Basics, Landlording & Rental Properties, Flipping Houses, Personal Finance, Business Management
301 Articles Written
I noticed a property listing on Craigslist, titled “$150000 THIS IS THE BEST DEAL IN TOWN” and decided to take a look. Since I was about to find out about the best deal in town, I was really anticipating what was to come. Sadly, what I found was just another loser property. If you’re new [...] View the full article: Income Real Estate Investors: Learn How to Analyze a Property before you Get Burned! on The BiggerPockets Blog. This content is Copyright © 2017 BiggerPockets, Inc. All Rights Reserved.

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Joshua Dorkin is a serial entrepreneur, investor, podcaster, publisher, educator, and co-author of
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    Trevor M.
    Replied over 12 years ago
    Hey Josh, Great post. Kind of funny seeing how a real estate broker will “twist” the facts to put a slightly better light on it huh. The realtor didn’t say… but his thoughts seem like he is saying it’s the best deal in town for someone who decides to live in one unit and rent the other out (still not that great of a deal). When you compare it to a SFH like he is doing, a person living in a SFH for a comparable home may be paying something like $1k to $1500 a month (mort., expenses, etc.). So, I guess that versus the smaller negative cashflow that the duplex produces makes it a “good deal” according to the realtor. Terrible logic on his part… but for someone who wants to live in one half and doesn’t care about living in a duplex… it may be a better deal than buying a SFH. Anyhow, like you said, realtors are there to sell real estate and it is up to us to determine what the right price is for our objectives. While I definetely wouldn’t touch this deal as an income property investment… it may be a good deal for a first time home buyer looking to get into a home and decrease their monthly payment. (still need to be ready to make the full payment though when the other unit is vacant) Nice work on calling out the realtor by the way 🙂 Trevor M.
    Rob Beland
    Replied over 12 years ago
    Just to bring in a different point of view on this Craig’s List ad I’d offer the following… In my market, North Central Massachusetts, but I think it applies to a good portion of Central and Eastern Mass. as well, investment in multi-families including duplexes has been crazy lately. When it comes to marketing duplexes and multis such as three and four families, more times than not the debt service isn’t even part of the equation. 90% of multis are selling to investors that are basically looking for an investment where they can park their cash and earn a decent return on it. Investors are not taking out 80% or even 70% mortgages, they are putting 50% and usually more down as the result of a 1031 exchange so their debt service is very low. Less important than monthly income is long-term appreciation and avoiding paying Uncle Sam. I’ve seen properties selling that basicaly break even cash flow wise but the buyer is able to sell a property he has owned for years and cash out and put his money into a solid multi with good tenants and he can make a solid 8.5% return on his investment. If an investor was cashing out and had $100K plus to invest, the numbers look a lot different… Just something to consider….
    Rob Beland
    Replied over 12 years ago
    Just to bring in a different point of view on this Craig’s List ad I’d offer the following… In my market, North Central Massachusetts, but I think it applies to a good portion of Central and Eastern Mass. as well, investment in multi-families including duplexes has been crazy lately. When it comes to marketing duplexes and multis such as three and four families, more times than not the debt service isn’t even part of the equation. 90% of multis are selling to investors that are basically looking for an investment where they can park their cash and earn a decent return on it. Investors are not taking out 80% or even 70% mortgages, they are putting 50% and usually more down as the result of a 1031 exchange so their debt service is very low. Less important than monthly income is long-term appreciation and avoiding paying Uncle Sam. I’ve seen properties selling that basicaly break even cash flow wise but the buyer is able to sell a property he has owned for years and cash out and put his money into a solid multi with good tenants and he can make a solid 8.5% return on his investment. If an investor was cashing out and had $100K plus to invest, the numbers look a lot different… Just something to consider….
    Jason
    Replied over 12 years ago
    I agree with most all of your points. The average investor these days does not know how to properly analyze an investment property. I built my own excel spreadsheet to do it for me. If anyone wants it e-mail me at: -Jason in Las Vegas
    Jason
    Replied over 12 years ago
    I agree with most all of your points. The average investor these days does not know how to properly analyze an investment property. I built my own excel spreadsheet to do it for me. If anyone wants it e-mail me at: -Jason in Las Vegas
    Tysan Cole Military from Temple, Texas
    Replied over 4 years ago
    How could I build an excel sheet for quick analysis? I’m pretty new and apparently I am doin the wrong math. I’m not sure what I’m doing wrong yet. Much appreciated.
    Indianapolis Realtor
    Replied over 12 years ago
    I think this is a great post and points out that especially in investment property it is “buyer beware”. I think this also speaks to the importance of getting a real estate agent to work for you on the buying side of the transaction. The selling agent does seem to be stretching it quite a bit, but they don’t work for the buyer. Get a good agent who can weed through the junk like this one and your life will be much easier.
    Aaron
    Replied over 12 years ago
    The response of the agent was not surprising. For many less-savvy investors, this would have seemed like an incredibly attractive deal. Their response shouldn’t come as a surprise, though- I just dealt with several brokers in NYC, and very little of what they say can be believed. Keep up the great work on your blog!
    Dimma
    Replied about 12 years ago
    This is really a great post. This will definitely help out in analyzing the property and save you before any mishappenings.
    Bob Martin
    Replied almost 12 years ago
    Current real estate markets nationwide have created countless opportunities for buyers looking to purchase real estate priced well under market value. Many buyers have turned to short sales, foreclosures and bank owned (REO) properties hoping to be able to purchase real estate for pennies on the dollar. The buzz in distressed real estate has been perpetuated by urban legends; someone’s brother’s, friend’s, uncle’s, co-worker’s dog who bought a home at 10 cents on the dollar. This buzz is further fueled by late night infomercials filled with testimonials of people who “bought a $500,000 home for $12” and then try to sell you the secret program that teaches you to do the same.
    Bob Martin
    Replied almost 12 years ago
    Current real estate markets nationwide have created countless opportunities for buyers looking to purchase real estate priced well under market value. Many buyers have turned to short sales, foreclosures and bank owned (REO) properties hoping to be able to purchase real estate for pennies on the dollar. The buzz in distressed real estate has been perpetuated by urban legends; someone’s brother’s, friend’s, uncle’s, co-worker’s dog who bought a home at 10 cents on the dollar. This buzz is further fueled by late night infomercials filled with testimonials of people who “bought a $500,000 home for $12” and then try to sell you the secret program that teaches you to do the same.
    Bob Martin
    Replied almost 12 years ago
    Current real estate markets nationwide have created countless opportunities for buyers looking to purchase real estate priced well under market value. Many buyers have turned to short sales, foreclosures and bank owned (REO) properties hoping to be able to purchase real estate for pennies on the dollar. The buzz in distressed real estate has been perpetuated by urban legends; someone’s brother’s, friend’s, uncle’s, co-worker’s dog who bought a home at 10 cents on the dollar. This buzz is further fueled by late night infomercials filled with testimonials of people who “bought a $500,000 home for $12” and then try to sell you the secret program that teaches you to do the same.
    Jeffrey King
    Replied over 9 years ago
    Determining the real returns an investment will provide can be daunting. As an analytic myself, I spent a good deal of time looking at my current investments, how they’ve performed, and how they’ve performed against my original expectations. In the end it really boils down to basic blocking and tackling. Rental income, Management, Taxes, Insurance, Mortgage, Vacancy allowance, Maintenance allowance, HOA fees, and deferred maintenance are the items that cause 95% of the pain if not properly evaluated within the context of the locality that one invests in. I spent a good deal of time creating my personal ‘property analyzer’, but have found that this free calculator does a pretty good job and also calcuates rate of return. https://www.meridianpacificproperties.com/properties/ayp If I picked the top 3 killers, it would be that I underestimated renovation costs (deferred maintenance), and didn’t allow for enough vacancy and maintenance on an annual basis in my initial calculations.
    Karen Richards Broker
    Replied over 9 years ago
    Most interesting post. As in every industry there are those who could be termed wannabe’s as well as newbie’s. This agent probably falls into one of those two, that being said grouping all real estate agents into one unscrupulous group is very unwise. This recent economic downturn has been great overall for the industry as it is weeding out the ones who should not be in the business to start with. yes this agent does work for the seller and it may be that this agent posted this questionable info at the sellers direction, we will probably never know. A very savey buyers agent would have seen through this right away.
    David
    Replied almost 8 years ago
    Your analysis is spot on. I don’t even have to put those figures in my spreadsheet to see that it’s a losing proposition! I moved from San Francisco to south Florida, and your post makes me think of 2 things. In S.F., I’ve had friends ask me how they can invest in a rental property in S.F. I tell them straight away, forget it! You can’t spend $475,000 on a 1 BR condo (with a $320 HOA, but we can even skip that for now!), rent it for $1,800 per month, and expect to make money. After PITI, let’s say it was bleeding $1,000 per month. At the very least, it’d have to appreciate $12,000 per year just to sort of break even (not even accounting for sales commissions). Bottom line: $475K for an $1,800 rent will never, ever work in any galaxy (except that one where appreciation was 15%+ per year for 5 years in a row!). In south Florida, I’m on the lookout for a duplex (or tri or quad). All the duplexes down here start at $120K minimum to rent for $650 a door. The duplexes in better locations go for $180K and up. At $90K a door, I could buy 3 condos for that price! Simply put, duplex (and tri and quad) prices here are out of whack with condo and SFH prices. At some point, they have to adjust because they just aren’t realistic. Thinking of that duplex for $300,000 in Denver, makes me wonder if the (silly) buyer of such a thing couldn’t figure out to buy 2 houses for that same amount, or less. That was a funny defense the selling agent gave for the pricing. Good post!
    David
    Replied almost 8 years ago
    Your analysis is spot on. I don’t even have to put those figures in my spreadsheet to see that it’s a losing proposition! I moved from San Francisco to south Florida, and your post makes me think of 2 things. In S.F., I’ve had friends ask me how they can invest in a rental property in S.F. I tell them straight away, forget it! You can’t spend $475,000 on a 1 BR condo (with a $320 HOA, but we can even skip that for now!), rent it for $1,800 per month, and expect to make money. After PITI, let’s say it was bleeding $1,000 per month. At the very least, it’d have to appreciate $12,000 per year just to sort of break even (not even accounting for sales commissions). Bottom line: $475K for an $1,800 rent will never, ever work in any galaxy (except that one where appreciation was 15%+ per year for 5 years in a row!). In south Florida, I’m on the lookout for a duplex (or tri or quad). All the duplexes down here start at $120K minimum to rent for $650 a door. The duplexes in better locations go for $180K and up. At $90K a door, I could buy 3 condos for that price! Simply put, duplex (and tri and quad) prices here are out of whack with condo and SFH prices. At some point, they have to adjust because they just aren’t realistic. Thinking of that duplex for $300,000 in Denver, makes me wonder if the (silly) buyer of such a thing couldn’t figure out to buy 2 houses for that same amount, or less. That was a funny defense the selling agent gave for the pricing. Good post!
    David
    Replied almost 8 years ago
    Your analysis is spot on. I don’t even have to put those figures in my spreadsheet to see that it’s a losing proposition! I moved from San Francisco to south Florida, and your post makes me think of 2 things. In S.F., I’ve had friends ask me how they can invest in a rental property in S.F. I tell them straight away, forget it! You can’t spend $475,000 on a 1 BR condo (with a $320 HOA, but we can even skip that for now!), rent it for $1,800 per month, and expect to make money. After PITI, let’s say it was bleeding $1,000 per month. At the very least, it’d have to appreciate $12,000 per year just to sort of break even (not even accounting for sales commissions). Bottom line: $475K for an $1,800 rent will never, ever work in any galaxy (except that one where appreciation was 15%+ per year for 5 years in a row!). In south Florida, I’m on the lookout for a duplex (or tri or quad). All the duplexes down here start at $120K minimum to rent for $650 a door. The duplexes in better locations go for $180K and up. At $90K a door, I could buy 3 condos for that price! Simply put, duplex (and tri and quad) prices here are out of whack with condo and SFH prices. At some point, they have to adjust because they just aren’t realistic. Thinking of that duplex for $300,000 in Denver, makes me wonder if the (silly) buyer of such a thing couldn’t figure out to buy 2 houses for that same amount, or less. That was a funny defense the selling agent gave for the pricing. Good post!
    Diana Cruz
    Replied almost 6 years ago
    Thank you for the insight on property selection and analysis for profitability. I really liked that your inquire to its greatness had your estimates of the properties return and expenses. I agree that Agents are there to sell and can be evasive of the actual facts. As a newbie I am glad to have this information.
    Tysan Cole Military from Temple, Texas
    Replied over 4 years ago
    I’m super new and learning Can someone please help me understand how he got 1637??? This is how I did it and I’m just wondering how is it not positive cash flow as well??? 300,000-60,000=240,000 240,000x.0725=17,400 +240,000 = 257,400 257,400/30=8580/12= 715$per month on loan plus interest 715+1200(monthly expenses) = 1915 in monthly expenses. NOI per month is 2400-1915=485positive.. Please help me. How should I have done it