Introduction to Real Estate Investment Analysis Part 1

Everyone who gets into real estate investing wants to be like Donald Bren—the wealthiest real estate mogul in the world, with an estimated net worth of $15.5 billion and hundreds of properties under his belt.

But how did Donald Bren know what to invest in, and which opportunities would give him great returns?

By doing property analysis the right way.

Today, we’re going to introduce you to the basics of rental real estate analysis in 3 steps and give you some tips on how to set yourself up for investment success.

Choose Your Property Type

The first thing you need to know is that there are different rental property types to invest in, like::

• - Residential: Single-family homes and apartments
• - Commercial: Offices and malls
• - Agricultural: Farms and ranches
• - Industrial: Warehouses and factories
• - Mixed-Use: A combination of multiple types, like residential and commercial
• - Special Purpose: Schools, cemeteries, etc.

We suggest that you start with renting out a residential property to learn and get the hang of things first, as it’s generally an easier and more common real estate investment, which means it’s simpler to acquire financing and analyze deals.

Look for a Property You’re Interested In

Browse house listings on sites like Zillow and Trulia to find potential rental investments, and if you want more information on Metro Detroit cities and neighborhoods in particular, you can check out this Deep Dive series for more options.

Once you see a property you like, gather the most important information you need to make an informed decision. Here’s an overview of what you need, and where to get it:

Analyze the Key Elements

The smallest changes in either income potential or renovation expenses can significantly affect your bottom line. So it’s time to do the math.

Money is at the root of all investments. Make sure you determine the financial viability and stability of a real estate investment before writing those checks!

The key elements in doing so are the following:

• - Net Operating Income (NOI)
• - Cash Flow
• - Capitalization Rate
• - Cash-on-Cash Return (COC)

Each of these elements indicates the potential performance and, ultimately, the return on investment (ROI) of a rental property, allowing you to make well-informed investment decisions.

You’ll need the property, purchasing, and financing details you gathered earlier to calculate potential rental performance. Let’s use a house, as of May 2023, along W Garfield Avenue in Hazel Park—a small suburb in the City of Detroit—as an example:

• Units/size: Two bedrooms, one bathroom, large backyard
• Price: $119,000 (less than the neighborhood average of $122k)
• Capitalization rate: 7% (below the 8-12% standard)
• Gross income: $1,200/month
• Vacancy rate: 11%
• Taxes: $235/month
• Insurance: $42/month
• Maintenance: $2,000
• Advertising: $300
• Utilities: $1,000
• Net operating income (NOI): $8,820

Using these details, we can estimate the budget needed to invest:

• Cost assumptions:
  • Purchase price: $119,000
• Down payment: $23,800 (estimated 20%)
• Closing costs: $4,760 (estimated 3-5%)
• Total cost = $147,560
• Cash outlay = $113,622 (estimated 23%)
• Financing assumptions:
  • Down payment: $23,800
• Financing: $95,000
• Interest rate: 6.79%
• Mortgage length: 30 years
• Mortgage payment = $763/month

The estimated cash outlay is $113k, where you’ll have a down payment of $23k and a monthly mortgage payment of $763. Will this be a good investment? How much money will the property make you? The key calculations below will show us the answer. Wanna find out how we got these numbers? Stay tuned for part 2 for the detailed breakdown.