Introduction to Analysis
Have you ever considered buying investment real estate? Are you curious about how you would go about analyzing the financial details of the property you are considering buying? How you would go about figuring out if the property were a good deal or rip-off?
The following is a detailed tutorial on how to do a thorough financial analysis of any multi-unit residential rental property you might be considering purchasing. While different sized properties require more or less analysis then you’ll find here, the information presented in this document is the basis for analyzing any sized multi-unit residential property, from two-unit duplexes to 500-unit apartment complexes.
While this analysis will certainly work for single-family rentals (in fact, this type of analysis will work for most investments, in general), the market value of single family homes is generally determined differently than multi-family properties. The value of single family homes (investment or not) is generally determined by market “comps.” Comps (or “comparables”) are those properties in the same area that have similar characteristics — same floorplan, same number of bedrooms/bathrooms, equivalent garage size, same amenities, etc. So, a single family investment home will generally rise in value if similar homes in the same area are rising in value, and lose value if similar homes in the area are losing value.
Larger investment properties (those with at least two units, and especially those over four units) are priced/valued differently. The value of larger investment properties is directly related to how much income/profit it produces for its owner. So, it’s possible that an apartment building in a neighborhood where house prices are dropping could be increasing in value — especially if the components of the market that drive income are improving.
The fact that multi-family properties are valued based on their income potential demonstrates how important good financial analysis of these properties is. You can’t just compare your apartment building to others down the street to see how much it’s worth.
I should also mention that, while this analysis will work for any multi-unit residential rental property, it is not sufficient for analyzing commercial property; for things like office, industrial, or retail space, you should seek additional guidance.
The goal is this document is to teach even the most novice real estate investor how to analyze the financial components of a rental property, but I expect more experienced investors will also find some good information in here.
Note: Keep in mind that while do financial analysis is relatively simple once you understand the basic concepts, it takes a little while to get a “feel” for how various inputs affect the overall outcome of the analysis. You should play with the numbers for a bunch of example properties, and see how the inputs affect the outputs.