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)
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…