Analyzing a Real Estate Investment

Detailed tutorial on how to do a thorough financial 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-


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.

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In this series of videos, we'll examine the basic financial analysis of a potential

real estate investment, using a mixed-use property as our example. In future episodes

we'll perform an in-depth analysis of this property, but for this first video we're

going to start the way many investors might: with a quick and simplified first pass.

Our purpose here is to vet some of the key numbers in order to decide if we think

this property is worth taking a more careful and in-depth look.

From a quantitative perspective, investing in real estate is somewhat like investing

in stocks. In order to profit in real estate investments, investors must determine

the value of the properties they buy and make educated guesses about how much profit

these investments will generate, whether through property appreciation, rental income

or a combination of both.

Equity valuation is generally performed through two standard methods: outright value

and relative value. The same holds true for property evaluation. Marking down future

net operating income (NOI) by the suitable savings rate for real estate resembles

discounted cash flow (DCF) assessments for stock, while incorporating the gross

earnings multiplier model in real estate is similar to relative value evaluations

with stocks.

Both of these real estate evaluation approaches appear fairly simple. However, in

practice, figuring out the value of an income-generating property making use of these

computations is relatively complexed. Firstly, getting the required information

concerning all of the formula inputs such as net operating income, the premiums

included in the capitalization rate and equivalent sales data might show to be very

time consuming and difficult. Secondly, these valuation models do not appropriately

consider possible major modifications in the real estate market such as a credit

crisis or real estate boom. As an outcome, more evaluation has to be performed to

anticipate and consider the possible impact of changing economic variables.

Because the property markets are less liquid than the stock market, sometimes it is

hard to acquire the required information to make a fully notified financial

investment decision. That stated, due to the big capital expense generally required

to purchase a large advancement, this complex evaluation can produce a big benefit if

it causes the discovery of an undervalued property (similar to equity investing).

Thus, putting in the time to research the required inputs is well worth the time and

energy. Here are some spreadsheets templates that might help.  Steps Ventures

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