Real Estate Deal Analysis - The Right and Wrong Ways
Real Estate Deal Analysis - The Right and Wrong Ways
A history of how people have incorrectly analyzed real estate deals.
In the beginning…
In the beginning, real estate investors—incorrectly—believed that cash flow was defined as:
You know this is wrong.
Better, But Still Wrong
Eventually, real estate investors came around and improved on how they analyze deals and said that cash flow is defined as:
Not just rent but ALL income on the property (net of vacancy)
Minus, not just mortgage payments but ALL the expenses on the property including (but not limited to):
Principal, Interest, Taxes and Insurance (PITI)
Private Mortgage Insurance (if applicable)
Landlord-paid utilities (if applicable)
Maintenance
Capital Expenses
Management
This was better, but still wrong.
Beyond Cash Flow
More time passed and we realized that cash flow wasn’t everything and that to take a more holistic approach to deal analysis, we should also consider the returns from:
And this was even better, but still wrong.
The Correct Way to Analyze Deals
The correct way to analyze deals was in front of us this whole time, but I taught it for the first time in this 2-hour class…