@Matt Donley
Great question. Agreed on evaluating cash flow using a 100% financing. I am going to try that out as well. I also look at many different ratios and expected return measures in conjunction with cash flow. But just to be honest the only real estate I have ever purchased was my home, so I am new to this as well. In fact, this is my first post on BP so I hope it adds some value:
Have you ever heard of Net Present Value (NPV) and Internal Rate of Return (IRR)? These are also great calculations to add to your analysis because they will take into account the time value of money. NPV is a calculation used to estimate the present value of all future cash flows compared against the initial cash outlay. The IRR is the rate of return that would make the present value of all future cash flows equal to the initial cash outlay. The IRR is the percentage rate earned on each dollar invested for each period invested.
Many corporations will use NPV and IRR to compare projects with different capital requirements and cash inflows/outflows to get an apples to apples comparison. The same principals can be applied to real estate investing. There are pitfalls and assumptions with these calculations so be wary.
You can also add in scenario analysis to estimate worst case (e.g. unexpected cap ex) and best case (e.g. forget best case because it probably won't happen) scenarios.
