Today, property investment opportunities seem to be available anywhere. However, not every situation advertised as a property investment opportunity is a good place to park your cash.

How should you, as an investor, begin to evaluate a property and determine its commercial viability and potential for cash flow? I am going to give you 3 ways… First, we are going to talk about the state of the property. Secondly, we will take a look at the community and it average rental rates. And finally, we are going to discuss cash on cash return.

This is by no means and exhaustive list. And, you will notice that I did not mention location. In some  cases property investment opportunities in areas that some may consider to be less than desireable, may actually return a higher cash on cash return to the savvy investor. And, if you follow well known investors like Robert Kiyosaki, they specifically state that they are looking for properties that would appeal to the average Joe rental customer. These properties stay rented in all economies whereas a luxury house or apartment may present difficulties when locating tenants in slow or down markets due to the higher price of rent.

So, lets begin by getting a good handle on the state of the property. Many times property investment opportunities can be found to be viable with a simple walk through. On the walk through its a great idea to have an individual with you who understands construction and quality craftsmanship.

On the walk through you are looking for obvious signs of problems. Water stains, the smell of mildew, or mill work and moulding which looks swollen can indicate water problems. Cracks in the ceiling or walls, cracks in a tile floor, or and uneven floor can indicate foundational problems. You will want to make a checklist of items for repair from floor to ceiling and everything in between and have a repair estimate done by a contractor.

If at this point in the walk through you decide to make an offer on the property, you would want to make that offer contingent on a professional inspection. Any problems requiring attention should be factored into your offer so as to negotiate a margin of safety at the point of purchase. The buy price is very important when examining property investment opportunities as it will effect your investment return forever.

Secondly, you will want to know what you can expect for rent where the property is located. If you know a real estate agent, they can simply pull comparable rents for you for any property that has been advertised and rented through the MLS database and give you a range: say for example 900 – 1100 dollars per month.

However, the MLS database will not have rents from properties that were rented by private individuals acting as landlord and renting the properties themselves. Still, its easy enough to talk to the neighbors and find out which properties are rentals nearby and simply knock on a few doors and ask the tenants what they are paying. This may give you an even tighter range of rents resulting in you being able to advertise your property fairly and calculate your returns more precisely.

And, if you notice a large number of properties for rent in a given area, move on. You do not want to have to compete with 5 other rentals on your same street. Give yourself every opportunity to win. If it takes you a long time to put a tenant in a property, then your return will be negatively affected. Why bother with that with so many other property investment opportunities on the market?

Now that you have examined several property investment opportunities: both by walking through the property and getting information on average rental rates, it is time to calculate your cash on cash return.

Cash on cash return as it relates to property investment opportunities is very simple to compute. So lets look at an example and some of the caveats associated with the computation using the property investment opportunities below:

Example 1: You purchase a single family home for 100k. The average rents are between $850 and $1000 per month. To compute your annualized cash on cash return simply take your monthly rent and multiply it by 12 to get your total income for the year, then divide your total income for the year by your purchase price. You then multiply the result by 100 to convert the decimal to a percentage

So at $850 per month the cash on cash return on the 100k invested in example 1 is:

Cash on cash return% = (total income ÷ purchase price) × 100 so

Cash on cash return% = ($850.00 × 12 months) ÷ $100,000.00 = .102

.102 × 100 = 10.2 or 10.2%

So the cash on cash return excluding expenses and tax advantages is 10.2%. Make sense? That was not so hard, right? Good. Let’s look at one more example.

Example 2: You purchase a single family home for 100k. The average rents are between $900 and $1100 per month. The maintenance is estimated at $500.00 per year. The property taxes are $800.00 per year. To compute your annualized cash on cash return we are going to do the same thing as before. And in addition, we are going to consider a couple real life expenses that you should use when evaluating property investment opportunities.

Lets say we rent the property for $1000 per month which is right in the middle of our range, but it takes 2 months to find a tenant. Based on the property tax and maintenance expenses above, what would our annualized cash on cash return be?

Total rents received = $1,000 × 10 months or $10,000.00 (remember it took 2 months to rent so we only have 10 months rent)

Total expenses = property tax + maintenance = $800.00 + $500.00  or $1,300.00

Total income = total rents received – total expenses =  $10,000.00 – $1,300.00 or $8,700.00

Cash on cash return% = (total income ÷ purchase price) × 100 so

Cash on cash return% = ($8,700.00 ÷ $100,000.00) × 100 = 8.7%

So with expenses the return becomes 8.7% in example 2 before tax advantages and write offs like depreciation.

Depending on how you structure your deal and hold the property you can increase your returns! The tax advantages of real estate are unmatched in any asset class and for that reason alone you should be looking at property investment opportunities. You may be able to add 3 – 5 percent to your annualized return through tax advantages alone!

There are other ways to increase your return as well. And I spell out one of them in my free ebook, “The 7 Secrets Every Cash Flow Investor Should Know”.  Follow this link to learn more and get your free copy of “The 7 Secrets” ebook today! You’ll soon be on well on your way to evaluating property investment opportunities for strong returns and cash flow.