Investment Property Roi

Investment Deal?

I’m thinking of purhcasing an investment property in downtown dallas texas, what should I analyze that will make sure I get a great deal?? How will I calculate ROI and how would I know if it is a good deal or not?

The first thing that many real estate investors look at is “cap rate” (This assumes you will rent the property for some time, not just flip it).

Cap rate is the “cash on cash” return, without any leverage. For example:

Purchase price: $1 million
Gross Rent/year: $100,000
Expenses/maintenance per year: $50,000 (assume 40%-55% of gross rent)

Operating Income: $100,000-$50,000 = $50,000

Cap rate = $50,000/$1 million = 5%

Obviously, you want this number to be as high as possible. It is a good number to base calculations on, because a) It assumes no appreciation of the property value and b) It assumes no leverage (which can distort the return figures).

I would shoot for cap rates above 8%, so you can easily cover interest on a mortgage (at 6%-7%) and leverage the property. Any increase in property value over time would be pure gravy.

If you want to flip the property, I would shoot for a minimum 20% cash-on-cash return (including fix-up costs). Flipping is harder than it looks, though.

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