If the rental property doesn’t seem to make financial sense after your initial analysis has been made, perhaps altering one or more of these will improve the financial picture and make the income property a good real estate investment.
1) Income: Can rents be increased, and can they be increased soon after you purchase the property? Would a change in the type of tenant in the building allow for higher rents, maybe the income is suffering because of poor or non-existent management? Can the building be used in some other way to increase income, such as a motel, or small offices? Be certain local zoning allows for any proposed changes. Is it reasonable to conclude that the property has the potential to provide other income such as a coin operated laundry facility, garages, or storage rooms?
2) Expenses: Take a close look at operating expenses to see whether any of them are excessive. If they are, is it reasonable to think that you can lower them? You can’t control every expense but you may save some money if you intend on doing your own lawn maintenance and repairs.
3) Financing: Try various alternatives in financing to see how the mortgage impacts cash flow, rate of return, and profitability merely by applying various financing techniques. Whereas one type of financing package might make your prospective real estate investment look unprofitable, another financing package might as easily turn your prospective property into a sound, profitable investment.
4) Cash flow: Don’t just consider the before-tax cash flow produced by the investment real estate to determine your overall benefits, but also look at the after-tax cash flow and determine what your property will give you in the way of a return after taxes. It’s always best to consider the elements of tax shelter such as the paper loss the IRS permits for income property depreciation.
5) Price: Tweak the price to see its affect on the cash flow and rates of return. Then select a price based on the most favorable rates of return and prepare those figures to discuss them with the seller. You might be surprised to discover a seller willing to listen to reason.
The point is that you should not throw out a real estate investment opportunity simply because the numbers don’t make sense. It might be possible perhaps, as the list above suggests, that you can still modify some aspects of the purchase that might make it a good investment.
Real Estate Software
Though you can accomplish each of the above with your own computations, it is strongly recommended that you use real estate investment software to achieve the results. When you use real estate investment software you are able to do more in seconds, not minutes or hours, and the reults are concise. Plus, you get presentation-ready reports that can instantly be given to sellers and buyers.
