How to Determine if Your Investment is a Good One | Property Management Blog

At gkhouses.com, we succeed when our property owners succeed. Our approach to property management is simple: we want our owners to have the best chance at success with their properties through agile and dependable professional property management. Part of that is providing counsel to our owners on real estate matters. One major concern that every investor often has (and one that they should have) is whether or not a particular property is a good investment. It’s not as simple as saying, “The house costs X dollars and I think I can get Y dollars in rent from it each month” and assuming that that is the only calculation you’ll need to make. You have to probe a bit further to really see if this particular property is better than that property. To evaluate a property – especially when compared to other properties – you need to first determine your gross effective income. This is your scheduled rents – how much you’ll make each month (extrapolate it for a 12-month period) – minus market vacancy and tenant turnover costs. In other words, determine how often tenants come and go, and figure out how much it will cost you, on average, to get the property ready for the next tenant. Once you have done that, you have to calculate fixed and variable expenses. Property tax bills, hazard insurance policy premiums, and utilities all factor into fixed expenses. Professional property management is also a fixed expense. Variable expenses include replacing major systems within the home. You can estimate if you’ll have to cover these costs by determining how old each system is or how long it’s been since a system (such as HVAC, the roof, etc) has been replaced or modified. Take all of these numbers and subtract them from your gross effective income to get your net operating income. Subtract your mortgage payments from that number to get what’s left over. If it’s a negative number, this property may be a bad investment. Performing due diligence on a property is extremely important to determine if it is a good investment. Contact us if you have more questions about evaluating properties and a market.