The prudent investor takes an objective look at an investment property before they consider a purchase. For example, a multi-unit residential investment property I have for sale on Randolph Street in Napa has a seven-page spreadsheet full of data useful to a buyer in making an informed decision.
Before we dive into key investment indicators, let us discuss the cash flow model because you need the cash flows to arrive at some indicators.
The Cash Flow Model
In part one, we discussed the income and expenses of a property, which is generalized as the annual property operation data (APOD). The APOD is property specific.
We briefly discussed in part two how debt is not a part of the APOD and is therefore not used in calculating the capitalization (CAP) rate. However, debt is used in determining cash flow.
While the APOD is property specific, the cash flow analysis is ownership specific because it takes into consideration debt (loans on property), owner contributions (cash into the property to help float it), leasing commissions, funded reserves, and taxes.Read More