Your rental property generates $36K a year.
Good deal?
It depends on what you're NOT seeing.
Beyond the headline number, here's what smart investors analyze:
1. Initial capital — How much did you put down? $100K? $200K? Less?
2. Opportunity cost — What could that down payment earn elsewhere? Your business? High interest savings?
3. True ROI — After property taxes, insurance, maintenance, and income taxes, what's your return?
4. Total return — Cash flow is only one component. Factor in appreciation, equity building, and tax advantages. These can be great benefits.
5. Hidden costs — Property management headaches, tenant issues, and time commitment aren't on your balance sheet but affect your life.
A property generating $36K might be brilliant for one investor and terrible for another.
The difference?
Understanding your complete financial picture and personal goals.
What's been your experience with rental properties? Worth the effort or more trouble than they're worth?
LinkedIn Challenge Day 2 of 10
How Apartment Deals Are Analyzed (part 1 of 2)
For those of you who don't know me, I've acquired 3,000 apartment units over the 25 years I've been investing in real estate. Below are the steps I go through when analyzing apartment deals:
Step 1: Calculate the PROFORMA/ Stabilized VALUE of the Apartment
This is the value of the apartment once it achieved market rent and its operation is stabilized.
To calculate the value, you need the gross proforma rent, the age of the building and the MARKET CAP RATE.
For example, if the current rent is $1,000 a month but it's the market rent is $1,300/month for a 100-unit, 50-yr old building in a 7% cap area, below is its proforma value:
Proforma Value = [$1300x12x100 units x (1-50% operating expense ratio)] divide by 7% cap
= $11,142,857
If the asking price of the property is way higher than its proforma (or future) value, I sometimes don't even proceed to step 2. For example, if the asking price is $15M, I don't even negotiate and waste my time because I need to offer BELOW proforma (or below $11M) to make money on the deal.
But let's say the asking price is reasonable for example, $9M and to increase the rent to market rents, I need to spend $10K per unit in renovation or $1M for an all-in cost of $10M, then I will proceed to step 2.
Step 2: Calculate the Returns from the Property
There are 2 returns or profit centers from any property:
Cashflow; and
Profit from resale
Let's calculate number 2 first. When I resell the building, say in 5 years, I will net approximately $1M ($11M+ less $10M).
Now let's calculate the cashflow. Let's use interest only financing to make the math simple. Let's say the interest rate is 8% and I put down 20%. How much will be my cashflow?
Cashflow = NOI - Debt service
NOI (proforma) = $1300x12x100 units x (1-50% operating expense ratio
= $780,000
Debt service = $10M all-in costs x (1- 20% downpayment) x 8%
= $640,000
Stabilized/proforma cashflow = $140,000
Step 3 is Calculate the 3 Metrics (Cash on cash, Equity Multiple and Internal Rate of Return)
To get Step 3 and to know how I decide which multifamily deal is a good deal or a bad deal, comment below.
#apartmentinvesting#realestateinvesting#commercialrealestate
We see thousands of deals a year.
Here’s how we screen each investment in 5 minutes or less:
When a stabilized deal comes through the door, we look at a few pieces of info:
1) Annual rents and vacancy allowance
What is the Potential Gross Income (PGI) on an annual basis?
(PGI = the total income the property could bring in if it were 100% occupied.)
We calculate the PGI by using materials like a rent roll to determine the rent that would be collected if all units were rented at full price 12 months a year.
Then, we subtract the vacancy allowance from your PGI to determine our Effective Gross Income (EGI).
PGI - Vacancy = EGI
2) Operating expenses
Operating expenses (OpEx) are estimated differently from market to market. Some use a % of EGI while others look at total expenses per unit.
At Breneman Capital, we have a huge advantage.
We can simply look at similar properties we already own and pull the expense comps from there. (No guesswork this way.)
Once we know the OpEx amount, we subtract that from the EGI to arrive at our NOI.
EGI - OpEx = NOI
3) Value
To arrive at the value, we divide the NOI by the Cap Rate prevalent in the market for similar properties.
If we arrive at a value at or above the asking price, it tells us that we’d be purchasing the property at a discount to market value. In this case, we’d likely engage the seller while we conduct a more thorough underwriting.
If we come in significantly lower than the asking price, we’ll move on to another opportunity.
NOI/Cap Rate = Value
If Value > Asking Price ✅
If Value < Asking Price ❌
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I’m curious — is your screening process similar?
How you can use Zillow’s hidden secrets to pick an investment property:
(From a 12-year Zillow executive)
Before we start, ask yourself this question:
“Is monthly cash flow or long-term appreciation potential more important to me?”
If you’re more interested in appreciation, you can identify landlord-friendly markets with high population and job growth by using data from the U.S. Census Bureau.
If you’re more interested in cash flow (or a hybrid) approach, here’s what you do…
𝗦𝘁𝗲𝗽 𝟭) 𝗨𝘀𝗲 𝘁𝗵𝗲 𝗿𝗲𝗻𝘁-𝘁𝗼-𝗽𝗿𝗶𝗰𝗲 𝗿𝗮𝘁𝗶𝗼
A.K.A: How much will a property rent for relative to how much it costs to buy?
(Some people use the “1% Rule”. Meaning, for every $1K in rent you collect per month, you don’t want to pay more than $100K to buy the property.
These days, 1% is difficult to pull off. I like to target 0.7% - 1% to be more realistic.)
Now, go to Zillow and look at the list price of a home relative to the rent Zestimate.
In a second, you’ll be able to tell whether the property is in the cash flow ballpark.
𝗦𝘁𝗲𝗽 𝟮) 𝗦𝗲𝗲𝗸 𝘀𝘂𝗽𝗽𝗹𝘆-𝗱𝗲𝗺𝗮𝗻𝗱 𝗶𝗺𝗯𝗮𝗹𝗮𝗻𝗰𝗲𝘀
Ok, so you’ve identified a good property.
But what you really want is a great one that will outperform the market in both rent and appreciation.
Here’s what to do:
• Go back to Zillow and look at how many renters have contacted the property owner relative to how long the property has been on the market.
• Compare that ratio to other properties or other areas to try to spot trends.
• Keep researching to find the rental price point where the ratio starts to deteriorate.
Once you find that “rent cliff” where rental demand falls off, make a note of it and try to buy properties that still cash flow well but fall just below that cliff.
𝗦𝘁𝗲𝗽 𝟯) 𝗔𝘀𝘀𝗲𝘀𝘀 𝘁𝗵𝗲 𝗻𝗲𝗶𝗴𝗵𝗯𝗼𝗿𝗵𝗼𝗼𝗱
The biggest mistake out-of-state investors make:
Buying in less desirable neighborhoods.
Use Zillow to evaluate school ratings so you can get a sense of the location before buying. Less desirable areas tend to cash flow the best — so make sure you do your homework.
𝗦𝘁𝗲𝗽 𝟰) 𝗟𝗲𝘃𝗲𝗿𝗮𝗴𝗲 𝗮𝗱𝘃𝗮𝗻𝗰𝗲𝗱 𝗳𝗶𝗹𝘁𝗲𝗿𝘀 𝘁𝗼 𝗳𝗶𝗻𝗱 𝗵𝗶𝗱𝗱𝗲𝗻 𝗴𝗲𝗺𝘀
• Go to Zillow’s “more filters” tab and use the open text keyword search at the bottom.
• Look at homes for sale and type "rental" to find landlords looking to sell.
• Search for "TLC" to find fixer-uppers or "assumable mortgage" to acquire a property with a 3% interest rate.
You can also use filters to find where institutional players are buying.
For rental listings, type "Invitation Homes" or "American Homes For Rent" in the filter to get some ideas of where they buy.
𝗦𝘁𝗲𝗽 𝟱) 𝗜𝗻𝘃𝗲𝘀𝘁!
That’s it.
What questions do you have about this strategy?
Let me know in the comments below.
From my experience, a common mistake real estate investors make is not doing enough research before jumping straight into a deal; sometimes, they simply forget to ask ALL of the right questions.
Here’s my framework to make sure you have all the bases covered.
I’m happy to share my editable deal analysis checklist – shoot me an email at lilian@accentir.com.
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1. Market
- Supply: Current inventory and new developments entering the market.
- Demand: Drivers of demand, such as population growth and business activity.
- Context: External factors like adjacent markets, news, or events influencing the market.
2. Financials
- Initial Investment: Development costs, acquisition costs, and capital expenditures.
- Operations: Projected revenue (rental income and other streams) and operating expenses.
- Financing: Debt structure, equity contributions, and cost of capital.
3. Strategy & Risk Management
- Execution Plan: Timeline, milestones, and key actions to achieve the business plan.
- Risk Analysis: Identification and mitigation of potential risks (e.g., leasing risks, market shifts).
- Exit Strategy: Long-term goals and options for exiting the investment, such as refinancing or selling.