Module 4: Analyzing Investment Properties

A Beginner's Guide to Building Wealth Through Property

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Module Overview

Time Required: 120-150 minutes
Difficulty Level: Beginner to Intermediate
Prerequisites: Modules 1-3 completed

Learning Objectives

By the end of this module, you will be able to:

1. Accurately estimate rental income for any property
2. Calculate all operating expenses including hidden costs
3. Understand and calculate key investment metrics (cash flow, cash-on-cash return, cap rate, ROI)
4. Analyze properties using the 1% rule and other screening tools
5. Project long-term returns including appreciation and equity buildup
6. Complete a comprehensive property analysis from start to finish
7. Identify good deals and recognize overpriced properties
8. Make confident, data-driven investment decisions

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Part 1: Understanding Investment Property Math

Real estate investing is fundamentally a numbers game. Emotions, hopes, and hunches lead to poor decisions. Data, analysis, and math lead to profitable investments.

This module teaches you how to "run the numbers" on any property so you can make intelligent decisions with confidence.

The Investment Analysis Framework

Every property analysis follows this structure:

Step 1: Determine Purchase Price What will you pay for the property?

Step 2: Estimate Rental Income What revenue will the property generate?

Step 3: Calculate Operating Expenses What will it cost to own and maintain the property?

Step 4: Calculate Cash Flow Income minus expenses = cash flow

Step 5: Calculate Investment Metrics How well does the investment perform?

Step 6: Project Long-Term Returns What happens over 5, 10, 20 years?

Step 7: Make Decision Buy, pass, or negotiate?

Let's work through each step systematically.

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Part 2: Estimating Rental Income

Accurate rental income estimates are critical. Overestimate rent and you'll buy a money pit. Underestimate and you'll miss good deals.

How to Determine Market Rent

Method 1: Online Rental Listings (Quick & Free)

Process:

1. Go to Zillow, Apartments.com, Craigslist, Facebook Marketplace
2. Search for rentals in target neighborhood
3. Filter by property type, beds, baths similar to your property
4. Note asking rents for 5-10 comparable properties
5. Calculate average

Important Notes:

• Use asking rents (what landlords want), not listed prices (what properties sold for)
• Look for recently listed properties (last 30 days)
• Adjust for condition differences (updated vs. dated)
• Check if utilities are included
• Verify properties are truly comparable (size, location, features)

Example Analysis:

Target Property: 3-bed, 2-bath, 1,400 sq ft, good condition

Comparable Rentals Found:
1. 3/2, 1,350 sq ft, good condition: $1,650
2. 3/2, 1,500 sq ft, excellent condition: $1,800
3. 3/2, 1,400 sq ft, average condition: $1,550
4. 3/2, 1,300 sq ft, good condition: $1,600
5. 3/2, 1,450 sq ft, good condition: $1,700

Average: $1,660
Median: $1,650
Conservative Estimate: $1,600 (using slightly below average)

Method 2: Rentometer (Quick Online Tool)

Process:

1. Go to Rentometer.com
2. Enter property address
3. Enter bedrooms, bathrooms
4. Review estimated rent range
5. Use as secondary validation

Pros:

• Fast and easy
• Shows percentile (helps gauge market position)
• Free basic version

Cons:

• Less accurate than manual research
• May include outdated data
• Doesn't account for condition/features

Method 3: Property Management Companies (Most Accurate)

Process:

1. Contact local property management companies
2. Describe your property
3. Ask what they could rent it for
4. Get 2-3 opinions

Pros:

• Most accurate (they rent properties daily)
• Understand local micro-markets
• May share vacancy rates and tenant demand

Cons:

• Takes more time
• May need to position as potential client
• Different companies may give varying estimates

Method 4: Local Real Estate Agents

Process:

1. Contact agents who handle rentals
2. Ask for rental comps (comparable properties)
3. Get their professional opinion

Pros:

• Access to MLS rental data
• Professional market knowledge
• May provide written rental comps

Cons:

• Not all agents handle rentals
• May be less accurate than property managers
• Takes time to establish relationship

Adjusting for Property Differences

Once you have comparable rents, adjust for differences:

Positive Adjustments (Charge More Rent):

• Updated kitchen/bathrooms: +$50-150/month
• Hardwood/upgraded flooring: +$25-75/month
• In-unit washer/dryer: +$75-150/month
• Garage/covered parking: +$50-100/month
• Fenced yard: +$25-75/month
• Extra bedroom: +$100-200/month
• Central air conditioning: +$50-100/month
• Better location within neighborhood: +$50-100/month

Negative Adjustments (Charge Less Rent):

• Dated kitchen/bathrooms: -$50-100/month
• Poor condition: -$100-200/month
• No central air: -$50-75/month
• Busy street/bad location: -$50-100/month
• Shared laundry or none: -$50-100/month
• No parking: -$50-75/month
• Less bedroom: -$100-200/month

Example Adjustment:

Comparable Property Rent: $1,500
- Has updated kitchen (+$100 to comp)
- Your property kitchen is dated (-$100 to your rent)
- Comp has garage (+$75 to comp)
- Your property no garage (-$75 to your rent)

Adjusted Estimated Rent for Your Property: $1,500 - $175 = $1,325

Conservative vs. Aggressive Rent Estimates

Conservative Approach (Recommended for Beginners):

• Use lower end of rent range
• Assume property won't rent at top of market
• Factor in longer vacancy periods
• Better to be pleasantly surprised than disappointed

Aggressive Approach:

• Use median or higher rent estimates
• Assume you'll get top-of-market rent
• Factor in minimal vacancy
• Risk: Cash flow problems if assumptions wrong

Example:

Rent Range for Comparables: $1,400 - $1,800
Average: $1,600

Conservative Estimate: $1,500 (below average)
Aggressive Estimate: $1,700 (above average)

Difference in Annual Income: $2,400
Impact on Deal Quality: Significant!

Recommendation: Always use conservative estimates. If the deal works with conservative numbers, it's truly a good deal.

Rental Income Red Flags

Be cautious if:

• Seller claims much higher rent than market comps show
• "Pro forma" (projected) rents significantly exceed current rents
• Property has been vacant for extended period
• Comparable properties sit on market for months
• Seller offers inflated rent estimates without documentation
• Area shows declining rents
• Many "For Rent" signs in neighborhood

Verify Everything:

• Ask to see current lease if property is rented
• Request rent roll for multi-unit properties
• Never take seller's word without verification
• Trust but verify

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Part 3: Calculating Operating Expenses

Many beginners dramatically underestimate expenses, destroying cash flow and making bad investments. Let's calculate every expense accurately.

The Complete Expense Categories

Fixed Expenses (Consistent Monthly):

1. Property taxes
2. Insurance
3. HOA fees (if applicable)
4. Mortgage payment (principal & interest)

Variable Expenses (Change Over Time): 5. Maintenance and repairs 6. Vacancy 7. Property management 8. Utilities (if landlord pays) 9. Lawn care/snow removal (if landlord pays) 10. Pest control 11. Capital expenditures (CapEx)

Let's break down each expense category:

1. Property Taxes

What It Is: Annual taxes paid to local government based on assessed property value.

How to Find:

• Check county assessor/treasurer website
• Look at current owner's tax bill
• Ask listing agent
• Review property listing details

Important Notes:

• Taxes may increase after sale (reassessment at new purchase price)
• Look at tax history to see trend
• Check for pending reassessments
• Understand local tax rates

Example:

Property Purchase Price: $200,000
Annual Property Tax: $2,400
Monthly Property Tax: $200

Calculation Check:
$2,400 ÷ 12 months = $200/month

Potential Increase After Purchase:

Current Owner's Tax (on $180,000 assessment): $2,160/year
Your Tax (on $200,000 purchase): $2,400/year
Difference: $240/year = $20/month increase

Factor this into your analysis!

2. Insurance

What It Is: Landlord/dwelling insurance covering the building (not tenant belongings).

Types of Coverage:

• Dwelling Coverage: The building itself
• Liability Coverage: Protects you from lawsuits
• Loss of Rents: Covers rent if property becomes uninhabitable
• Personal Property: Covers appliances you own

How to Estimate:

• Get actual quotes from insurance agents
• Typical cost: $500-1,500/year ($42-125/month) for single-family
• More for multi-family
• Varies by location (flood zones, hurricane areas cost more)

Factors Affecting Cost:

• Property value
• Age of home
• Location/natural disaster risk
• Claims history
• Deductible amount
• Coverage limits

Never Skimp on Insurance: Proper coverage protects your investment. Saving $200/year isn't worth risking a $200,000 asset.

Example:

Single-Family Home: $800/year = $67/month
Duplex: $1,200/year = $100/month
Fourplex: $2,000/year = $167/month

3. HOA Fees (If Applicable)

What It Is: Monthly fees for condos and some townhouses/planned communities.

What It Covers:

• Exterior maintenance
• Common area upkeep
• Amenities (pool, gym)
• Insurance on building exterior
• Trash/water sometimes

How to Find:

• Listed in property details
• Ask seller/agent
• Review HOA documents

Critical Analysis:

$350/month HOA fee = $4,200/year

This dramatically impacts cash flow!

Ask yourself:
- What does it cover?
- Is HOA financially healthy?
- Any special assessments coming?
- Are fees rising rapidly?
- Do fees provide value?

HOA Red Flags:

• Rapidly rising fees (10%+ annually)
• Low reserve funds
• Deferred maintenance visible
• Special assessments recently levied
• High percentage of delinquencies

4. Mortgage Payment (Principal & Interest)

What It Is: Monthly loan payment if financing the property.

How to Calculate: Use mortgage calculator or formula:

Example:
Loan Amount: $160,000
Interest Rate: 7%
Term: 30 years

Monthly P&I: $1,064

(Principal + Interest only, not including taxes and insurance)

Important Notes:

• This is NOT an operating expense for cash-on-cash return calculations
• It IS a cash expense affecting cash flow
• We'll separate this in our metric calculations

5. Maintenance and Repairs

What It Is: Ongoing costs to keep property functional and rentable.

Includes:

• Plumbing repairs
• Electrical fixes
• Appliance repairs
• HVAC servicing
• Painting
• Minor repairs
• Pest control
• Lawn maintenance (if landlord responsibility)

How to Estimate:

Method 1: Percentage of Rent

• Conservative: 10-15% of gross rent
• Moderate: 8-10% of gross rent
• Aggressive (new property): 5-8% of gross rent

Method 2: Per Square Foot

• $0.50-1.00 per square foot per year
• 1,500 sq ft home: $750-1,500/year = $63-125/month

Method 3: Fixed Dollar Amount

• Single-family: $100-200/month
• Multi-family: $75-150/month per unit

Example (Conservative):

Rent: $1,500/month
Maintenance (10%): $150/month
Annual: $1,800

Covers:
- Occasional plumbing issues
- Minor repairs
- HVAC servicing
- Appliance repairs
- Misc fixes

Reality Check: Some years you'll spend $0. Other years you'll spend $3,000. The average matters for analysis.

Property Age Considerations:

• New property (0-10 years): Lower maintenance (5-8% of rent)
• Mid-age (10-30 years): Standard maintenance (8-12% of rent)
• Older (30+ years): Higher maintenance (12-15% of rent)

6. Vacancy

What It Is: Lost rent when property is unoccupied between tenants or during repairs.

How to Calculate: Set aside percentage of annual rent to account for vacancy.

Typical Rates:

• Strong market: 5% (18 days per year)
• Average market: 8% (29 days per year)
• Weak market: 10-15% (36-55 days per year)

Calculation:

Annual Rent: $18,000
Vacancy Rate: 8%
Annual Vacancy Cost: $1,440
Monthly Vacancy Reserve: $120

This means accounting for ~29 days vacant per year

Don't Assume Zero Vacancy: Even in strong markets, tenants move. You'll have turnover. Between tenants, you'll have:

• Time to clean/repair
• Time to show property
• Time to screen tenants
• Possible market conditions delaying rental

Conservative Approach: Use 8-10% vacancy even in strong markets.

7. Property Management

What It Is: Fee paid to property management company if you hire one.

Typical Costs:

• Monthly Fee: 8-12% of monthly rent
• Leasing Fee: 50-100% of first month's rent (one-time when placing tenant)
• Markup on Maintenance: 10-20% on contractor work

Example:

Rent: $1,500/month
Management Fee (10%): $150/month
Annual Cost: $1,800

Plus Leasing Fee: $1,500 (when tenant placed)
If tenant stays 2 years: $1,500 ÷ 24 months = $63/month effective
Total Effective Management Cost: $213/month

Self-Management: If managing yourself, factor your time cost:

• Showing property: 2-4 hours
• Screening tenants: 1-2 hours
• Lease preparation: 1 hour
• Monthly rent collection and communication: 30 min/month
• Maintenance coordination: 1-3 hours/month
• Accounting and record keeping: 1 hour/month

Recommendation: Include management fees in analysis even if self-managing initially. This gives you:

• True picture of property performance
• Option to hire manager later
• Accurate comparison between properties

8. Utilities (If Landlord Pays)

What It Includes:

• Water/sewer
• Trash
• Gas
• Electric
• Internet

Who Pays: Varies by market and property type:

• Single-family: Usually tenant pays all utilities
• Multi-family: Landlord often pays water/trash, sometimes gas/electric for common areas
• Condos/Townhouses: HOA may cover some utilities

Estimation:

If landlord pays water/sewer/trash:
Typical: $75-150/month depending on area

If landlord pays all utilities:
Can be $200-400/month total
Significantly impacts cash flow!

Strategy: Pass as many utilities to tenant as possible. Every utility you pay reduces cash flow and creates variable expense risk.

9. CapEx (Capital Expenditures)

What It Is: Major repairs/replacements for big-ticket items that wear out over time.

Major Systems and Lifespans:

• Roof: 15-25 years (Replace: $5,000-15,000)
• HVAC: 12-18 years (Replace: $4,000-8,000)
• Water Heater: 8-12 years (Replace: $800-1,500)
• Appliances: 8-15 years (Replace each: $500-1,200)
• Flooring: 10-20 years (Replace: $2,000-8,000)
• Paint (Exterior): 7-15 years (Cost: $3,000-8,000)
• Windows: 20-30 years (Replace: $5,000-15,000)

How to Estimate CapEx:

Method 1: Percentage of Rent

• Set aside 5-10% of rent for future CapEx
• $1,500 rent × 8% = $120/month

Method 2: Per System Calculation

Example Property Analysis:

Roof (20-year life, $10,000 replacement):
Annual Reserve: $10,000 ÷ 20 = $500/year = $42/month

HVAC (15-year life, $6,000 replacement):
Annual Reserve: $6,000 ÷ 15 = $400/year = $33/month

Water Heater (10-year life, $1,200 replacement):
Annual Reserve: $1,200 ÷ 10 = $120/year = $10/month

Appliances (12-year life, $3,000 for all):
Annual Reserve: $3,000 ÷ 12 = $250/year = $21/month

Flooring (15-year life, $4,000):
Annual Reserve: $4,000 ÷ 15 = $267/year = $22/month

Total CapEx Reserve: $128/month

Important: CapEx is not spent monthly—it's reserved for when systems need replacement. Some years you'll spend $0, other years $10,000. We account for the average.

Newer vs. Older Properties:

• New property (all systems new): ~5% of rent
• Average property (systems 5-10 years old): ~8% of rent
• Older property (systems 10+ years old): ~10-12% of rent

The Complete Expense Example

Let's calculate total expenses for a sample property:

PROPERTY DETAILS:
Purchase Price: $200,000
Rent: $1,600/month
Property Type: Single-family, 1,400 sq ft, 15 years old

MONTHLY EXPENSES:

Fixed Expenses:
Property Tax: $200
Insurance: $83
HOA: $0
Subtotal Fixed: $283

Mortgage (Not Operating Expense):
Loan: $160,000 at 7%, 30 years
P&I Payment: $1,064

Variable Operating Expenses:
Maintenance (10% of rent): $160
Vacancy (8% of rent): $128
Property Management (10% of rent): $160
CapEx Reserve (8% of rent): $128
Utilities: $0 (tenant pays)
Subtotal Variable: $576

TOTAL OPERATING EXPENSES: $859/month
TOTAL CASH EXPENSES (with mortgage): $1,923/month

MONTHLY CASH FLOW:
Income: $1,600
Operating Expenses: $859
Mortgage: $1,064
Total Expenses: $1,923

NET MONTHLY CASH FLOW: $1,600 - $1,923 = -$323 (NEGATIVE!)

This property has NEGATIVE CASH FLOW!
Should you buy it? Let's learn the metrics to decide...

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Part 4: Key Investment Metrics Explained

Now that you can calculate income and expenses, let's learn the metrics that tell you if a property is a good investment.

1. Cash Flow

Definition: The money remaining each month after all expenses (including mortgage) are paid.

Formula:

Cash Flow = Rental Income - All Expenses (Operating + Mortgage)

Example:

Monthly Rent: $1,800
Operating Expenses: $900
Mortgage: $1,100
Cash Flow: $1,800 - $900 - $1,100 = -$200/month

Annual Cash Flow: -$200 × 12 = -$2,400/year

What It Means:

• Positive: Money in your pocket each month
• Negative: You pay out of pocket each month
• Break-even: Income exactly covers expenses

Target for Beginners:

• Minimum: $100/month per property
• Good: $200-300/month per property
• Great: $400+/month per property

Important Notes:

• Negative cash flow isn't always bad (if appreciation is strong)
• Positive cash flow is critical for beginners (safety buffer)
• Cash flow improves over time (rents rise, mortgage stays fixed)

2. Cash-on-Cash Return (CoC)

Definition: The annual return on the actual cash you invested.

Formula:

Cash-on-Cash Return = (Annual Cash Flow ÷ Total Cash Invested) × 100

Total Cash Invested Includes:

• Down payment
• Closing costs
• Immediate repairs/improvements
• Reserves (sometimes included, sometimes not)

Example:

Annual Cash Flow: $3,600 ($300/month)
Total Cash Invested: $50,000

CoC Return = ($3,600 ÷ $50,000) × 100 = 7.2%

What It Means: Your invested capital is returning 7.2% annually in cash flow alone (not including appreciation, tax benefits, or equity buildup).

Target Returns:

• Minimum: 5-6% (comparable to stock market without work)
• Good: 8-10%
• Great: 12%+
• Exceptional: 15%+

Why CoC Matters:

• Compares investments with different prices/down payments
• Shows efficiency of your invested capital
• Helps decide between multiple properties

Comparison Example:

PROPERTY A:
Price: $150,000
Down Payment: $30,000
Cash Flow: $200/month = $2,400/year
CoC: $2,400 ÷ $30,000 = 8%

PROPERTY B:
Price: $200,000
Down Payment: $40,000
Cash Flow: $300/month = $3,600/year
CoC: $3,600 ÷ $40,000 = 9%

Property B is better use of capital despite higher price!

3. Cap Rate (Capitalization Rate)

Definition: The return on property as if purchased all cash (no financing).

Formula:

Cap Rate = (Net Operating Income ÷ Purchase Price) × 100

Where NOI = Gross Rent - Operating Expenses (excluding mortgage)

Example:

Purchase Price: $200,000
Annual Rent: $18,000
Annual Operating Expenses: $7,200

NOI = $18,000 - $7,200 = $10,800

Cap Rate = ($10,800 ÷ $200,000) × 100 = 5.4%

What It Means: If you bought the property all cash (no loan), you'd earn 5.4% annually on your investment.

Why Cap Rate Matters:

• Compares properties regardless of financing
• Shows property's inherent return
• Market indicator (low cap = expensive market, high cap = cheaper market)

Typical Cap Rates by Market:

• A-class properties/markets: 4-6%
• B-class properties/markets: 6-8%
• C-class properties/markets: 8-10%
• D-class properties/markets: 10%+

Important Notes:

• Cap rate ignores financing (all-cash perspective)
• Cash-on-cash return accounts for leverage
• Both metrics matter for complete picture

Cap Rate vs. Cash-on-Cash:

Property: $200,000 purchase, 20% down

Cap Rate: 6% (property's inherent return)
Cash-on-Cash: 10% (your leveraged return)

Leverage improves your return!

4. Gross Rent Multiplier (GRM)

Definition: How many years of gross rent equal the purchase price.

Formula:

GRM = Purchase Price ÷ Annual Gross Rent

Example:

Purchase Price: $180,000
Annual Rent: $21,600 ($1,800/month)

GRM = $180,000 ÷ $21,600 = 8.3

Translation: It takes 8.3 years of gross rent to equal purchase price

What It Means: Lower GRM = better deal (less expensive relative to rent) Higher GRM = expensive (more years to recoup purchase price)

Typical GRMs:

• Strong cash flow markets: 8-12
• Balanced markets: 12-15
• Appreciation-focused markets: 15-20+

Why GRM Matters:

• Quick screening tool
• Easy to calculate
• Compares properties quickly

Limitations:

• Ignores expenses completely
• Doesn't account for financing
• Less useful than cash-on-cash or cap rate

Best Use: Initial screening. If GRM is reasonable, do deeper analysis.

5. Return on Investment (ROI)

Definition: Total return including cash flow, appreciation, equity buildup, and tax benefits.

Formula (Simplified):

ROI = (Total Benefits ÷ Total Investment) × 100

Total Benefits = Cash Flow + Appreciation + Equity Buildup + Tax Savings

Example (Year 1):

Total Investment: $50,000

Year 1 Benefits:
Cash Flow: $3,000
Appreciation (3%): $6,000
Equity from Principal Paydown: $2,400
Tax Savings (depreciation): $2,000
Total Benefits: $13,400

ROI = ($13,400 ÷ $50,000) × 100 = 26.8%

What It Means: Your total return (all sources) is 26.8%, far exceeding cash flow alone.

This Is Why Real Estate Works: Multiple return sources compound to create exceptional returns even when cash flow is modest.

6. The 1% Rule (Quick Screening Tool)

Definition: Monthly rent should equal or exceed 1% of purchase price.

Formula:

Monthly Rent ÷ Purchase Price ≥ 0.01 (1%)

Examples:

PROPERTY A:
Purchase: $150,000
Rent: $1,600
Ratio: $1,600 ÷ $150,000 = 1.07% ✓ PASSES

PROPERTY B:
Purchase: $250,000
Rent: $2,000
Ratio: $2,000 ÷ $250,000 = 0.8% ✗ FAILS

PROPERTY C:
Purchase: $100,000
Rent: $1,200
Ratio: $1,200 ÷ $100,000 = 1.2% ✓ PASSES (strong!)

What It Means:

• Passes 1% rule = likely positive cash flow
• Fails 1% rule = probably negative cash flow
• Higher than 1% = better cash flow potential

Important Notes:

• The 1% rule is a SCREENING tool, not a final analysis
• High-appreciation markets rarely meet 1% rule
• Passing 1% rule doesn't guarantee good investment
• Must do full analysis regardless

Regional Variations:

• Cash flow markets: Often meet or exceed 1% rule
• Appreciation markets: Often 0.5-0.7% (below 1%)
• Balance markets: Often 0.8-1%

Modified Rules:

• 2% Rule: Rare but indicates exceptional cash flow
• 0.7% Rule: Some investors accept in strong appreciation markets

7. Debt Service Coverage Ratio (DSCR)

Definition: How many times NOI covers debt service (mortgage payment).

Formula:

DSCR = Net Operating Income ÷ Annual Debt Service

Debt Service = Annual mortgage payments (P&I only)

Example:

Annual Rent: $19,200
Operating Expenses: $7,200
NOI: $12,000

Annual Mortgage Payments: $12,768
DSCR = $12,000 ÷ $12,768 = 0.94

What It Means:

• DSCR > 1.0: Income covers mortgage (positive cash flow)
• DSCR = 1.0: Income exactly covers mortgage (break-even)
• DSCR < 1.0: Income doesn't cover mortgage (negative cash flow)

Targets:

• Minimum: 1.0 (break-even)
• Good: 1.2-1.25 (20-25% cushion)
• Great: 1.4+ (40% cushion)

Why It Matters:

• DSCR loans require this ratio for approval (usually 1.0-1.25)
• Shows financial safety margin
• Indicates resilience to expense increases

8. Net Operating Income (NOI)

Definition: Income remaining after operating expenses but before mortgage payments.

Formula:

NOI = Gross Rental Income - Operating Expenses

Operating Expenses = Everything EXCEPT mortgage payment

Example:

Gross Annual Rent: $21,600
Property Tax: $2,400
Insurance: $1,000
Maintenance: $1,920
Vacancy: $1,728
Management: $1,920
CapEx: $1,728
Total Operating Expenses: $10,696

NOI = $21,600 - $10,696 = $10,904

Why NOI Matters:

• Used to calculate cap rate
• Used to calculate DSCR
• Shows property performance independent of financing
• Commercial properties valued on NOI

Metrics Summary Table

Metric	Formula	What It Shows	Target
Cash Flow	Rent - All Expenses	Monthly profit/loss	$200+ positive
Cash-on-Cash	Annual CF ÷ Invested $	Return on your capital	8-10%+
Cap Rate	NOI ÷ Price	Property's yield	6-10%
GRM	Price ÷ Annual Rent	Price/rent relationship	8-15
1% Rule	Rent ÷ Price	Quick screening	≥1%
DSCR	NOI ÷ Debt Service	Cash flow safety	≥1.25
NOI	Rent - Opex	Operating profit	Higher better

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Part 5: Complete Property Analysis Walkthrough

Let's analyze a real property from start to finish using everything we've learned.

Sample Property: 123 Main Street

Property Details:

• Purchase Price: $225,000
• Type: Single-family, 3 bed, 2 bath
• Square Feet: 1,500
• Age: 12 years
• Condition: Good (some updates needed)

Financing:

• Down Payment: 20% ($45,000)
• Loan Amount: $180,000
• Interest Rate: 7%
• Term: 30 years
• Monthly P&I: $1,197

Closing Costs: $6,000 Initial Repairs: $4,000 Total Cash Invested: $55,000

Step 1: Estimate Rental Income

Research:

Comparable Rentals (3/2, similar size):
1. $1,750 (excellent condition)
2. $1,600 (good condition)
3. $1,550 (average condition)
4. $1,650 (good condition)
5. $1,625 (good condition)

Average: $1,635
Our Property Condition: Good, but needs minor updates

Conservative Estimate: $1,600/month
Annual Rent: $19,200

Step 2: Calculate Operating Expenses

MONTHLY OPERATING EXPENSES:

Property Tax: $225 (verified with county)
Insurance: $100 (quote obtained)
HOA: $0
Maintenance (10% of rent): $160
Vacancy (8% of rent): $128
Property Management (10% of rent): $160
CapEx (8% of rent): $128
Utilities: $0 (tenant responsibility)

Total Operating Expenses: $901/month
Annual Operating Expenses: $10,812

Step 3: Calculate Cash Flow

MONTHLY CASH FLOW:

Rental Income: $1,600
Operating Expenses: -$901
Mortgage Payment (P&I): -$1,197

Monthly Cash Flow: $1,600 - $901 - $1,197 = -$498

Annual Cash Flow: -$5,976

RESULT: NEGATIVE CASH FLOW!

Initial analysis shows negative cash flow. Should we immediately reject this property? Let's look at all metrics.

Step 4: Calculate Investment Metrics

Net Operating Income (NOI):

Annual Rent: $19,200
Operating Expenses: $10,812
NOI: $8,388

Cap Rate:

Cap Rate = ($8,388 ÷ $225,000) × 100 = 3.7%

This is LOW. A-class property territory.

Cash-on-Cash Return:

Annual Cash Flow: -$5,976
Total Invested: $55,000
CoC = (-$5,976 ÷ $55,000) × 100 = -10.9%

NEGATIVE return on cash flow alone!

Gross Rent Multiplier:

GRM = $225,000 ÷ $19,200 = 11.7

This is moderate to high—property is relatively expensive compared to rent.

1% Rule:

$1,600 ÷ $225,000 = 0.71%

FAILS the 1% rule (below 1%)

DSCR:

NOI: $8,388
Annual Debt Service: $14,364
DSCR = $8,388 ÷ $14,364 = 0.58

Well below 1.0—income doesn't cover mortgage!

Step 5: Long-Term Analysis

Despite negative cash flow, let's look at total returns:

Year 1 Complete Return:

Cash Flow: -$5,976
Principal Paydown: $2,880 (builds equity)
Appreciation (3%): $6,750
Tax Savings (depreciation, approx): $2,500
Total Year 1 Benefit: $6,154

ROI = ($6,154 ÷ $55,000) × 100 = 11.2%

5-Year Projection:

Cash Flow: -$5,976/year × 5 = -$29,880
Principal Paydown: ~$15,500
Appreciation (3%/year): ~$36,000
Tax Savings: ~$12,500
Total 5-Year Benefit: $34,120

Average Annual Return: 12.4%

Step 6: Decision Making

The Numbers Tell Us:

• Cash Flow: Negative $498/month (RED FLAG for beginners)
• CoC: -10.9% (Poor cash return)
• Cap Rate: 3.7% (Low—typical of expensive market)
• Total ROI: 11.2% (Good when including all benefits)

This Property Is:

• Appreciation play, not cash flow
• Suitable for experienced investors with capital reserves
• NOT suitable for beginners needing cash flow
• Might work in strong appreciation market

VERDICT: PASS (for beginner focused on cash flow)

Why Pass:

1. Negative cash flow requires feeding property monthly
2. Risky if job loss or expenses increase
3. No cushion for unexpected issues
4. Better opportunities likely exist

Who Should Buy This:

• Investor with strong reserves
• High-income earner wanting appreciation
• Someone in this market long-term
• Investor comfortable with negative cash flow

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Part 6: Running Your Own Analysis

Now you try. Use this template for any property:

Property Analysis Template

PROPERTY INFORMATION:
Address: _______________________
Purchase Price: $_______________
Property Type: _________________
Beds/Baths: ____________________
Square Feet: ___________________
Year Built: ____________________
Condition: _____________________

FINANCING:
Down Payment (%): ______________
Down Payment ($): $______________
Loan Amount: $__________________
Interest Rate: _________________
Term: _________________________
Monthly P&I: $__________________

TOTAL CASH INVESTED:
Down Payment: $_________________
Closing Costs (3-5%): $__________
Initial Repairs: $______________
Reserves: $_____________________
Total: $________________________

INCOME:
Monthly Rent: $__________________
Annual Rent: $___________________

OPERATING EXPENSES (MONTHLY):
Property Tax: $__________________
Insurance: $____________________
HOA (if any): $__________________
Maintenance (8-12% rent): $_______
Vacancy (8% rent): $______________
Management (10% rent): $__________
CapEx (8% rent): $_______________
Utilities (if LL pays): $__________
Other: $________________________
Total Operating Expenses: $_______

CASH FLOW ANALYSIS:
Monthly Rent: $__________________
Operating Expenses: -$___________
Mortgage Payment: -$_____________
Monthly Cash Flow: $_____________
Annual Cash Flow: $______________

KEY METRICS:
Net Operating Income: $__________
Cap Rate: _______%
Cash-on-Cash Return: _______%
Gross Rent Multiplier: __________
1% Rule: ______% (Pass/Fail)
DSCR: __________________________

LONG-TERM PROJECTION (YEAR 1):
Cash Flow: $_____________________
Principal Paydown: $______________
Appreciation (____%): $___________
Tax Savings: $___________________
Total Return: $__________________
Total ROI: _______%

DECISION:
[ ] BUY - Great deal, meets criteria
[ ] NEGOTIATE - Good if price reduced to $________
[ ] PASS - Doesn't meet investment criteria

NOTES:
________________________________
________________________________
________________________________

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Part 7: Advanced Analysis Considerations

Sensitivity Analysis (What If Scenarios)

Test your analysis against different scenarios:

Scenario 1: Rent Lower Than Expected

Expected Rent: $1,600
Actual Rent: $1,450 (10% lower)

Impact:
- Cash Flow decreases $150/month
- CoC return drops significantly
- May turn positive cash flow negative

Lesson: Conservative rent estimates protect you

Scenario 2: Expenses Higher Than Expected

Expected Maintenance: $150/month
Actual Maintenance: $250/month (major repair year)

Impact:
- Cash Flow decreases $100/month
- May eliminate positive cash flow

Lesson: Adequate reserves are critical

Scenario 3: Extended Vacancy

Expected Vacancy: 8% (29 days)
Actual Vacancy: 90 days (25% of year)

Impact:
- Lost rent: $4,500
- Property loses money that year
- Reserves depleted

Lesson: Strong cash flow provides cushion

Scenario 4: Interest Rate Change (if refinancing)

Current Rate: 7%
Refinance Rate: 6%

Impact:
- Monthly payment decreases ~$100
- Cash flow improves ~$100/month
- CoC return improves

Lesson: Lower rates improve returns

Break-Even Analysis

What price makes this property work?

If property doesn't cash flow at asking price, calculate maximum price you'd pay:

Target Cash Flow: $200/month minimum
Current Cash Flow: -$300/month

Needed Improvement: $500/month = $6,000/year

Sources of Improvement:
Option 1: Lower purchase price
- Need to reduce mortgage payment by $500/month
- Requires ~$75,000 lower loan
- Offer: $150,000 instead of $225,000

Option 2: Combination
- Lower price by $40,000 ($185,000)
- Reduces payment by ~$266/month
- Find property with $234/month higher rent
- Combination makes deal work

Appreciation Scenarios

How does appreciation affect returns?

Property: $200,000 purchase
Annual Cash Flow: $2,400

3% Appreciation:
Year 5 Value: $231,855 (gained $31,855)
Year 10 Value: $268,783 (gained $68,783)

5% Appreciation:
Year 5 Value: $255,256 (gained $55,256)
Year 10 Value: $325,779 (gained $125,779)

Even 2% difference in appreciation dramatically impacts wealth building!

Market Cycle Timing

When you buy matters:

Buying at Market Peak (2006):

• Purchase: $250,000
• Market drops 30% (2008-2010)
• Value: $175,000
• Underwater on mortgage
• Forced to hold or take loss

Buying at Market Bottom (2011):

• Purchase: $175,000
• Market recovers (2013-2020)
• Value: $300,000
• Built substantial equity
• Multiple exit options

Lesson: Understand your market cycle. Buying at peaks is risky; buying in recovery/early expansion is ideal.

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Part 8: Key Takeaways from Module 4

Core Principles

1. Analysis is everything:

   • Emotions lie; numbers tell truth
   • Conservative estimates protect you
   • Detailed analysis prevents costly mistakes

2. Income and expenses must be accurate:

   • Research comparable rents thoroughly
   • Account for ALL expenses (many beginners forget CapEx, vacancy)
   • Get actual quotes, don't guess

3. Multiple metrics provide complete picture:

   • Cash flow: Monthly profit/loss
   • CoC: Return on invested capital
   • Cap rate: Property's inherent yield
   • All matter; don't rely on just one

4. Cash flow is king for beginners:

   • Positive cash flow provides safety
   • Negative cash flow is risky
   • Appreciation is bonus, not strategy

5. Long-term returns include multiple sources:

   • Cash flow
   • Appreciation
   • Equity buildup
   • Tax benefits
   • Combined returns often 15-25% annually

6. The 1% rule is a starting point:

   • Quick screening tool
   • Not a final decision maker
   • Always do full analysis

7. Conservative analysis prevents problems:

   • Underestimate rents slightly
   • Overestimate expenses
   • Account for vacancy
   • Build in cushion

Common Analysis Mistakes to Avoid

Mistake 1: Optimistic Rent Estimates

• Using asking price instead of actual rent
• Assuming top-of-market rent
• Not accounting for condition differences

Mistake 2: Underestimating Expenses

• Forgetting CapEx reserve
• Ignoring vacancy
• Not accounting for all maintenance

Mistake 3: Failing to Account for All Cash Invested

• Only counting down payment
• Forgetting closing costs
• Ignoring immediate repairs needed

Mistake 4: Relying on Seller's Numbers

• Seller-provided rent may be inflated
• Pro forma numbers are projections, not reality
• Always verify independently

Mistake 5: Ignoring Market Comparisons

• Every metric should be compared to market averages
• 5% cap rate in 8% cap market means overpriced
• Understand your market's typical metrics

Mistake 6: Analysis Paralysis

• Don't overanalyze and miss opportunities
• Get comfortable making decisions with good (not perfect) information
• Move forward when numbers work

Your Action Steps

Before proceeding to Module 5, complete these tasks:

1. ✅ Analyze 10 Properties in Your Market

   • Find 10 properties for sale
   • Estimate rents using comparables
   • Calculate all expenses
   • Compute key metrics
   • Make buy/pass decisions

2. ✅ Create Your Analysis Spreadsheet

   • Build or download analysis template
   • Input formulas for automatic calculations
   • Customize for your market
   • Practice until comfortable

3. ✅ Study Your Market Metrics

   • What's typical cap rate in your area?
   • Average GRM?
   • Do properties meet 1% rule?
   • What's normal cash-on-cash return?

4. ✅ Identify Your Deal Criteria

   • Minimum cash flow required
   • Target cash-on-cash return
   • Acceptable property types
   • Maximum price range
   • Write down your rules

5. ✅ Practice Rent Estimation

   • Research rents for 20 properties
   • Compare to your estimates
   • Refine your estimation skills
   • Build confidence in valuation

6. ✅ Contact Property Managers

   • Ask about typical expenses in your market
   • Get real-world management costs
   • Learn about vacancy rates
   • Build relationships

7. ✅ Take the Module 4 Quiz

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Module 4 Self-Assessment Quiz

Test your understanding. Answers provided at the end.

1. What is cash flow? a) Total rental income collected b) Net operating income c) Money remaining after all expenses including mortgage d) Gross profit before taxes

2. Which expense category includes roof replacement? a) Maintenance b) CapEx (Capital Expenditures) c) Operating expenses d) Fixed expenses

3. A property generates $1,500 rent. Using 10% rule, how much should you reserve for maintenance? a) $100 b) $150 c) $200 d) $250

4. What does a cash-on-cash return of 8% mean? a) Property appreciates 8% annually b) Rent increases 8% annually c) You earn 8% return on your invested cash annually d) Property value increases 8%

5. The 1% rule says: a) Rent should equal 1% of loan amount b) Monthly rent should equal 1% or more of purchase price c) Property should appreciate 1% annually d) Expenses should be 1% of rent

6. A property costs $200,000 and rents for $1,400/month. Does it pass the 1% rule? a) Yes b) No c) Not enough information

7. What is Net Operating Income (NOI)? a) Rent minus mortgage payment b) Rent minus all expenses c) Rent minus operating expenses (excluding mortgage) d) Rent minus taxes

8. What vacancy rate should beginners typically use? a) 0% (assume always rented) b) 3-5% c) 8-10% d) 15-20%

9. Cap Rate is calculated as: a) Cash Flow ÷ Purchase Price b) NOI ÷ Purchase Price c) Rent ÷ Purchase Price d) Profit ÷ Investment

10. True or False: A property with negative cash flow is always a bad investment.

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Quiz Answers

1. c) Money remaining after all expenses including mortgage
2. b) CapEx (Capital Expenditures)
3. b) $150 (10% of $1,500)
4. c) You earn 8% return on your invested cash annually
5. b) Monthly rent should equal 1% or more of purchase price
6. b) No ($1,400 ÷ $200,000 = 0.7%, below 1%)
7. c) Rent minus operating expenses (excluding mortgage)
8. c) 8-10% (provides adequate safety buffer)
9. b) NOI ÷ Purchase Price
10. False - Can work in strong appreciation markets for experienced investors with reserves, though risky for beginners

Scoring:

• 9-10 correct: Excellent! You can analyze properties confidently.
• 7-8 correct: Good work! Review missed concepts.
• 5-6 correct: Fair. Practice more analyses.
• Below 5: Review the entire module and practice property analysis.

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Conclusion: You Can Now Analyze Any Property

Congratulations on completing Module 4! This is one of the most critical modules in the course. You now possess the analytical skills to evaluate any investment property confidently.

You've mastered:

• Accurately estimating rental income
• Calculating all operating expenses (including often-forgotten costs)
• Understanding key investment metrics
• Running complete property analyses
• Making informed buy/pass decisions
• Using conservative assumptions to protect yourself

Most importantly: You can now look at any property listing and within 20-30 minutes determine if it deserves deeper investigation. You won't waste time on bad deals, and you won't miss good opportunities.

The Power of Analysis: Analysis separates successful investors from those who struggle. Investors who run numbers make money. Those who invest on emotion lose money. You're now in the first group.

Practice Makes Perfect: Analyze 20-30 properties and you'll become very comfortable. Analyze 50-100 properties and you'll develop intuition. The time investment now saves you from expensive mistakes later.

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You're ready for Module 5: Finding and Evaluating Properties.

In the next module, you'll learn where to find investment opportunities, how to work with real estate agents, what to look for during property inspections, and how to identify red flags before making offers.

You can analyze properties. Now let's learn how to find them.

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"Price is what you pay. Value is what you get." — Warren Buffett