How to Analyse Investment Property​?

When I first started investing in real estate, I soon realised how crucial it was to conduct in-depth maths for real estate investment analysis. But knowing how to analyze investment property​, and getting into the specifics of transaction analysis felt like going into gibberish. Understanding the cap rate, NOI, Money-on-cash refund, the entire profit left me scratching my head. So, I chose to seek advice from a real estate advisor. Let me share what I learned!

How to Analyze an Investment Property?

The advisor said that I can optimise my investing potential and make well-informed, data-driven decisions by becoming an expert in these indicators,

• Net Operating Income (NOI): It is the amount of money that remains after operating costs (but not loan costs) are subtracted. The formula for calculating NOI, which gauges property profitability, is NOI = Earnings – Expenses.

• Cash Flow: The money left over after all costs, including loan payments, have been paid is known as cash flow. It is determined by subtracting expenses (including debt) from income, and it represents the net income from your property.

• Cash-on-Cash Return: A genuine assessment of investment performance is provided by the cash-on-cash return metric, which assesses returns on actual cash invested.

• Return on Investment (ROI): ROI stands for return on investment, which measures overall profitability and demonstrates how well your investment produces returns.

• Capitalization Rate (Cap Rate): The capitalisation rate, or cap rate, is a crucial metric for projecting possible returns. It is computed as follows: cap rate = NOI / property price.

• Internal Rate of Return (IRR): Time and profitability are taken into account when estimating annualised returns using the internal rate of return, or IRR.

I hope this information helps you in analysing your property investment. Also I was told that this is based on the first year of property ownership. Future years will see an increase in yearly equity, inflation-driven cost increases, fluctuations in rental rates, market fluctuations, and changes in tax laws. 

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