Residential Property Analysis

Real Estate Investment Analysis Tools

Real estate professionals, including home buyers and investors, rely on several key calculations to quickly assess the value or appeal of a property. These tools are commonly used for residential property analysis but can also be applied to commercial properties.

Return on Investment (ROI)

The ROI is a useful metric for determining the rate of return on an investment property. It is calculated by dividing the Net Income by the Total Down Payment. This formula helps to evaluate and compare the potential returns of different properties:

Gross Income – All Expenses = Net Income
Net Income / Total Down Payment

For example:

• $12,000 / $100,000 = 12% ROI

1% Rule

The 1% Rule is a quick calculation landlords use to determine if a property will generate a suitable rental income. According to the rule, the monthly rent should be at least 1% of the property’s acquisition cost. So, if a house is purchased for $200,000, the expected rental income should be $2,000 per month.

70% Rule

The 70% Rule is a guideline used by real estate investors, particularly "flippers," to determine the maximum offer price for a property. It helps investors assess the value of a house after repairs (ARV – After Repair Value) and estimate the costs of necessary renovations (rehab expenses). The offer price is calculated as follows:

(ARV x 70%) – All Rehab Expenses = Offer Price

For example:

• ($200,000 ARV x 70%) – $40,000 Rehab Expenses = $100,000 Offer Price

Cash on Cash Return (CCR)

The Cash on Cash Return (CCR) measures the cash flow return on the cash invested in the property. It helps investors evaluate the income generated by the property relative to the initial cash investment, though it is not a comprehensive profitability measure. The formula is:

Before-Tax Cash Flow / Total Cash Invested x 100

For example:

• $6,000 / $60,000 x 100 = 10% CCR

Capitalization Rate (Cap Rate)

The Capitalization Rate (Cap Rate) is a key ratio used by investors to estimate the value of an income-producing property. It is calculated by dividing the Net Operating Income (NOI) by the property's selling price or market value. The NOI is the gross income minus all expenses, excluding loan interest, income taxes, and depreciation.

Net Operating Income / Selling Price or Market Value

For example:

• $8,000 / $100,000 = .08 or 8% Cap Rate