An easy-to-understand and easy-to-implement financial analysis method for real estate investment.

Real estate investment requires careful planning at any time to avoid mistakes that lead to losses. There are two ways investors participate in the real estate market: buying and selling quickly (also known as flipping properties), and holding long-term.

So how can you do the calculations quickly and efficiently without doing too many complicated calculations? A realtor won't be able to do these things for you, so you shouldn't rely on them. As an investor, you must be the one to do the calculations.

FLIP HOUSE:

To determine profitability, simply answer the following questions:

1. Can you buy it for less than its market value?
2. If home repairs are needed, can you complete them at a cost lower than the final value of the house?

Therefore, it is crucial to conduct thorough research, accurately assess the property, and purchase it below its market value, ensuring that even after repairs, the total cost remains lower than the market price.

The minimum price must be at least 20% lower than the market price. Only then will repairs be quick and sales profitable.

Some people, during a booming market, get caught up in the frenzied bidding frenzy, forgetting to consider that if they flip a house and buy it at or above market value, they will end up losing money on renovations.

LONG-TERM HOME RESERVATION

When investing in a long-term home ownership, the crucial factor is whether the property is sufficient to cover your living expenses. Download this Excel spreadsheet , fill in the blue text, and the formulas will calculate the costs for you.

If the house has 4 rooms for rent, and you rent out 3 rooms and live in 1, then you should also record the price for the room you live in, treating it as if you were renting the entire house. This way, the formula will run accurately. There are a few things to pay attention to in the Excel spreadsheet:

• Vacancy: the percentage of rooms available for rent. The ideal occupancy rate for a rental property is 5-10%. Therefore, careful market research is necessary when buying a house to rent out.
• Net Cash Flow: the amount of money remaining after deducting all mortgage and fees.
• Debt Coverage Ratio (DCR): the ratio of income to debt. A DCR of 1 is just enough to cover all expenses, including the mortgage. If it's below that and your Net Cash Flow is negative, it means you'll need to cover the remaining amount to maintain the house. The ideal DCR for investors is 1.2 or 1.3 to mitigate risk.

Therefore, the calculations involved in buying a house to flip and buying a house to hold long-term are quite different.

• For flip houses: the most important thing is market price, how to buy, and how to sell. And this figure is viewed in the short term.
• Long-term rental property: the important thing isn't the current market price, but whether the rental property is sustainable enough to hold until the market improves before selling.

You can do business using either of these two methods at any time. For example, even when the real estate market is stagnant like it is now, many motivated sellers want to sell their houses quickly at a low price because they need money, so it's still possible to buy a house at a cheap price.

As an investor, you can always find opportunities in any market, no matter what kind it is.