Cash Flow and Financial Analysis Models

For those starting out in real estate and for those that are eagerly awaiting their first investment purchase, the process may seem very simple. You search for a property you like and can afford, purchase the property and fix up what needs fixing, and then you turn around and sell or rent it at a profit. Isn’t investing that simple? If it were that simple there wouldn’t be any risk involved in real estate investing and everybody would be doing it successfully. The truth is that bad investments are made, and there are a few things you can do to make sure you don’t make one.

Besides the fluctuating economy, stock market, and house values, one of the biggest risks there is in real estate is to make a bad investment. And when a bad investment is made, there is only one person that can be held responsible. The investor. Is there a way to avoid common first time investor mistakes? There are a few tools that are great additions to a first time investor, but also an organized and detailed approach to budget analysis and the bottom line is incredibly important.

The number one question to ask when investing in a property for the first time or even the one-hundredth time, is how much return will I see on my investment? The answer to that question shouldn’t be with vagueness or approximations, but rather with firm predictions and educated, informed market evaluation. Sometimes if the numbers aren’t crunched correctly, and if impatience pushes the pen more than prudence you could find yourself hastily in a heap of trouble.

Be realistic. There are expenses, sometimes hidden depending on the property that affect a property’s profit margin. Without a clear grasp on what the initial and final investment numbers will be and without the tangible means to organize your finances accordingly, you will have no way to determine how the cash will flow once it has been filtered through the investment process and back into your wallet. Without organizing your investment or calculating a strategy, you will easily find yourself on the road to a bad investment.

Here are a few short tern goals to consider before jumping in. It is best to satiate the lender you are working with by pre-leasing or assuring “debt coverage cash flow”. In addition, take into consideration that whatever the first year minimum cash return requirement is for the investor, meet it. Another goal to try and reach is to be aware that for the “holding period”, try your best to predict what the minimum rates of return will be internally. Occupancy is also something to consider. Don’t assume your property will be at 100% occupancy as soon as you open the door, however setting high goals for the property will act as motivation for you to fill any empty space and to sell any stagnant property.