How to analyze a deal?

Question

I am new to real estate investment. After reading some related books and podcasts, I want to give it a try. Like many newbies, I am wondering how to perform a throughout analysis of a property which can be qualified as a good deal? Any tool recommended?

I know NY/NJ area in where I live and work, may not be an easy area to find deals. But I am a firm believer that there are always good deals in any market. I hope all of you could share your inspiring and successful stories so I can learn from.

Thank you very much in advance.

Michael S. · Answer

@Leo Tsang

These biggerpockets videos can show you how to analyze deals using the calculators

https://www.youtube.com/results?search_query=biggerpockets+how+to+analyze+a+deal&page=&utm_source=opensearch

Account Closed · Answer

These are some calculations that every investor should be familiar with whether they are flipping houses or buying commercial real estate.

• Gross Scheduled Income (GSI): Gross Scheduled Income is the income that a property would generate if it was 100% occupied and all rents were collected.GSI = Total month rents at 100% occupancy X 12 months
• Gross Scheduled Income is the income that a property would generate if it was 100% occupied and all rents were collected.
• GSI = Total month rents at 100% occupancy X 12 months
• Effective Gross Income (EGI): Effective Gross Income is a metric that helps investors plan for real world market vacancy rates and credit losses. Credit losses incurred when the property owner is unsuccessful in collecting rent from a tenant for various reasons.EGI = Gross Scheduled Income - Vacancy and Credit Loss
• Effective Gross Income is a metric that helps investors plan for real world market vacancy rates and credit losses. Credit losses incurred when the property owner is unsuccessful in collecting rent from a tenant for various reasons.
• EGI = Gross Scheduled Income - Vacancy and Credit Loss
• Gross Operating Income (GOI): Gross Operating Income is the sum Effective Gross Income and additional income from “other” sources. Other sources of income could include application fees, late fees, trash pickup and parking.GOI = Effective Gross Income + All Other Income
• Gross Operating Income is the sum Effective Gross Income and additional income from “other” sources. Other sources of income could include application fees, late fees, trash pickup and parking.
• GOI = Effective Gross Income + All Other Income
• Net Operating Income (NOI): Net Operating Income provides a estimate for the property’s income after operating expenses. NOI = Gross Operating Income - Operating Expenses
• Net Operating Income provides a estimate for the property’s income after operating expenses.
• NOI = Gross Operating Income - Operating Expenses
• Cash Flow: This is the formula used to determine an investment property’s cashflow after operating expenses and debt service. Debt service is a term used to represent the loan payments on a property when using leverage. Cash Flow = Net Operating Income - Debt Service
• This is the formula used to determine an investment property’s cashflow after operating expenses and debt service. Debt service is a term used to represent the loan payments on a property when using leverage.
• Cash Flow = Net Operating Income - Debt Service
• Cash On Cash Return: Cash On Cash Return is a metric used to represent the rate of return of cash income earned on the cash invested into the property. The Cash On Cash Return is the return an investor makes in relation only to the cash invested in the property. Cash On Cash Return is represented as a percentage. When analyzing real estate deals you want to look for deals that will yield a double digit cash on cash return. Remember that you should plan for contingencies when analyzing a deal. The deal financials need to make sense even when the market takes a downturn and the property experiences higher vacancy rates. Cash On Cash Return = Annual Cash Flow / Total Cash Invested
• Cash On Cash Return is a metric used to represent the rate of return of cash income earned on the cash invested into the property. The Cash On Cash Return is the return an investor makes in relation only to the cash invested in the property. Cash On Cash Return is represented as a percentage.
• When analyzing real estate deals you want to look for deals that will yield a double digit cash on cash return. Remember that you should plan for contingencies when analyzing a deal. The deal financials need to make sense even when the market takes a downturn and the property experiences higher vacancy rates.
• Cash On Cash Return = Annual Cash Flow / Total Cash Invested
• Internal Rate of Return (IRR): The Internal Rate of Return (IRR) is another metric used to evaluate the profitability of an investment. IRR is a discount rate that makes the Net Present Value (NPV) of all cashflow of an investment equal to zero. Think of IRR as the rate of growth that the investment will generate over time. The higher the IRR the higher the return on your investment. This calculation relies on the same formula for NPV.
• The Internal Rate of Return (IRR) is another metric used to evaluate the profitability of an investment. IRR is a discount rate that makes the Net Present Value (NPV) of all cashflow of an investment equal to zero. Think of IRR as the rate of growth that the investment will generate over time. The higher the IRR the higher the return on your investment. This calculation relies on the same formula for NPV.
• 
• Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio is the amount of cashflow an asset produces that is available for debt obligations.DSCR = Net Operating Income / Total Debt Service
• Debt Service Coverage Ratio is the amount of cashflow an asset produces that is available for debt obligations.
• DSCR = Net Operating Income / Total Debt Service
• Capitalization Rate (Cap Rate): The Cap Rate is the rate of return on a property based on income that the property is expected to generate. The Cap Rate represents a percentage return an investor would receive if they made an all cash purchase.Higher Cap Rates are consistent with properties that have higher risk and may be more management intensive. These properties are generally class C properties and tend to have a lower sales price which make them more favorable to beginning investors.Cap Rates are can be specific to certain regions in your market. A well informed commercial broker should be able to tell you the going Cap Rate for a specific area and asset type. You can use this term as a metric to compare multiple properties you are interested in. Cap Rate = NOI / Market Value of The Property
• The Cap Rate is the rate of return on a property based on income that the property is expected to generate. The Cap Rate represents a percentage return an investor would receive if they made an all cash purchase.
• Higher Cap Rates are consistent with properties that have higher risk and may be more management intensive. These properties are generally class C properties and tend to have a lower sales price which make them more favorable to beginning investors.
• Cap Rates are can be specific to certain regions in your market. A well informed commercial broker should be able to tell you the going Cap Rate for a specific area and asset type. You can use this term as a metric to compare multiple properties you are interested in.
• Cap Rate = NOI / Market Value of The Property
• Break Even Ratio: The Break Even Ratio is a calculation that measures the comparative relationship between your income and expenses. This calculation is used to assess the risk of a property by identifying the maximum vacancy rate the property could sustain before cashflow becomes negative. Break Even Ratio = (Debt Service + Operating Expenses) / Gross Operating Income
• The Break Even Ratio is a calculation that measures the comparative relationship between your income and expenses. This calculation is used to assess the risk of a property by identifying the maximum vacancy rate the property could sustain before cashflow becomes negative.
• Break Even Ratio = (Debt Service + Operating Expenses) / Gross Operating Income
• Gross Rent Multiplier (GRM: The Gross Rent Multiplier is a calculation used to measure the current market value of an property and is used to compare several investments. GRM = Cost or Market Value / Gross Schedule Income
• The Gross Rent Multiplier is a calculation used to measure the current market value of an property and is used to compare several investments.
• GRM = Cost or Market Value / Gross Schedule Income
• Operating Expense Ratio: The Operating Expense Ratio is a calculation that is used to determine the cost to operate a property compared to the income that it generates. Operating Expense Ratio = Operating Expenses / Gross Operating Income
• The Operating Expense Ratio is a calculation that is used to determine the cost to operate a property compared to the income that it generates.
• Operating Expense Ratio = Operating Expenses / Gross Operating Income
• Price Per Unit: Price Per Unit is used to evaluate investment property and compare it to other properties like it in your market. If the average Price Per Unit in your market is $75,000 and the seller is asking for $125,000 per unit then you need to look further into why the price is so much higher.Price Per Unit = Price / Number of Units
• Price Per Unit is used to evaluate investment property and compare it to other properties like it in your market. If the average Price Per Unit in your market is $75,000 and the seller is asking for $125,000 per unit then you need to look further into why the price is so much higher.
• Price Per Unit = Price / Number of Units
• Price Per Square Foot: Price Per Square Foot is another metric used to compare and evaluate investment properties.Price Per Square Foot = Price / Total Area or Rentable Area
• Price Per Square Foot is another metric used to compare and evaluate investment properties.
• Price Per Square Foot = Price / Total Area or Rentable Area

• Gross Scheduled Income is the income that a property would generate if it was 100% occupied and all rents were collected.
• GSI = Total month rents at 100% occupancy X 12 months

• Effective Gross Income is a metric that helps investors plan for real world market vacancy rates and credit losses. Credit losses incurred when the property owner is unsuccessful in collecting rent from a tenant for various reasons.
• EGI = Gross Scheduled Income - Vacancy and Credit Loss

• Gross Operating Income is the sum Effective Gross Income and additional income from “other” sources. Other sources of income could include application fees, late fees, trash pickup and parking.
• GOI = Effective Gross Income + All Other Income

• Net Operating Income provides a estimate for the property’s income after operating expenses.
• NOI = Gross Operating Income - Operating Expenses

• This is the formula used to determine an investment property’s cashflow after operating expenses and debt service. Debt service is a term used to represent the loan payments on a property when using leverage.
• Cash Flow = Net Operating Income - Debt Service

• Cash On Cash Return is a metric used to represent the rate of return of cash income earned on the cash invested into the property. The Cash On Cash Return is the return an investor makes in relation only to the cash invested in the property. Cash On Cash Return is represented as a percentage.
• When analyzing real estate deals you want to look for deals that will yield a double digit cash on cash return. Remember that you should plan for contingencies when analyzing a deal. The deal financials need to make sense even when the market takes a downturn and the property experiences higher vacancy rates.
• Cash On Cash Return = Annual Cash Flow / Total Cash Invested

• The Internal Rate of Return (IRR) is another metric used to evaluate the profitability of an investment. IRR is a discount rate that makes the Net Present Value (NPV) of all cashflow of an investment equal to zero. Think of IRR as the rate of growth that the investment will generate over time. The higher the IRR the higher the return on your investment. This calculation relies on the same formula for NPV.
•

• Debt Service Coverage Ratio is the amount of cashflow an asset produces that is available for debt obligations.
• DSCR = Net Operating Income / Total Debt Service

• The Cap Rate is the rate of return on a property based on income that the property is expected to generate. The Cap Rate represents a percentage return an investor would receive if they made an all cash purchase.
• Higher Cap Rates are consistent with properties that have higher risk and may be more management intensive. These properties are generally class C properties and tend to have a lower sales price which make them more favorable to beginning investors.
• Cap Rates are can be specific to certain regions in your market. A well informed commercial broker should be able to tell you the going Cap Rate for a specific area and asset type. You can use this term as a metric to compare multiple properties you are interested in.
• Cap Rate = NOI / Market Value of The Property

• The Break Even Ratio is a calculation that measures the comparative relationship between your income and expenses. This calculation is used to assess the risk of a property by identifying the maximum vacancy rate the property could sustain before cashflow becomes negative.
• Break Even Ratio = (Debt Service + Operating Expenses) / Gross Operating Income

• The Gross Rent Multiplier is a calculation used to measure the current market value of an property and is used to compare several investments.
• GRM = Cost or Market Value / Gross Schedule Income

• The Operating Expense Ratio is a calculation that is used to determine the cost to operate a property compared to the income that it generates.
• Operating Expense Ratio = Operating Expenses / Gross Operating Income

• Price Per Unit is used to evaluate investment property and compare it to other properties like it in your market. If the average Price Per Unit in your market is $75,000 and the seller is asking for $125,000 per unit then you need to look further into why the price is so much higher.
• Price Per Unit = Price / Number of Units

• Price Per Square Foot is another metric used to compare and evaluate investment properties.
• Price Per Square Foot = Price / Total Area or Rentable Area

Hope that helps.

Account Closed · Answer

I recommend learning the formulas and making a custom spreadsheet using Google Sheets.

Kuba F. · Answer

@Leo Tsang Welcome to BP!

What type of real estate investing are you interested in? Flipping, Buy and Hold, House Hacking, BRRRR, 5+ unit apartments? That will help narrow down the type of analysis advice we can give.

Leo Tsang · Answer

Thanks

How to analyze a deal?

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