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:

Rent - Mortgage Payment

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:

• Appreciation

• Debt Paydown, and

• Tax Benefits of Depreciation

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…