How to Evaluate a Rental Property Before Purchase
A practical guide to evaluating income-generating real estate, including yield calculations, cash flow analysis, and risk assessment.
Introduction
Purchasing a rental property is one of the most significant investments you'll make in your life. In this post, I'll teach you the accepted methods for property valuation.
Important Metrics
1. Cap Rate (Capitalization Rate)
Formula: Cap Rate = (Net Annual Income / Property Price) × 100
Here's a comparison of average yields in different US markets:
2. Cash Flow
The following chart shows projected cash flow for a $200,000 property investment:
Expense Breakdown
It's important to understand the expense structure before buying:
Practical Tips
Remember: Always plan for the pessimistic scenario. What happens if the property sits vacant for 3 months?
- Check the history - Who lived there before? Why did they leave?
- Know the tenants - Good tenants are worth more than high yield
- Think about exit - Will you be able to sell the property easily?
Summary
Evaluating a rental property requires deep analysis, not just looking at the price. If you're considering purchasing an investment property, I'd be happy to help you analyze the deal.