Yesterday I posted a short article titled Do You Like To Play Russian Roulette? And I joked that you don’t want to do a financial analysis of your potential investment properties if you like to live life on the edge.
Of course, I was joking. (Though some didn’t seem to think it was funny based on an email I received.) You do need to do a financial analysis of EVERY property you are considering for your investment portfolio. Every one of them.
Net Operating Income can be the key number when working your financial analysis for these rental houses. How do you determine Net Operating Income (NOI)?
Gross Operating Income
Net Operating Income
Pretty simple formula, huh? Wait. How do you know what numbers to plug in? It’s critical you know the actual rent values of that rental property AND that neighborhood. It’s critical you can determine the vacancy rate. It’s critical that you know each and every expense.
What expenses should be included? Anything that costs you money to run that home. Insurance, real estate taxes, repairs, HOA dues, management, utilities, advertising, supplies, mileage, signs, miscellaneous. Get the picture?
Once you have all of those numbers (ever heard of a Schedule E?) then you can get down to putting pencil to paper.