Real Estate Profitability Index

The Real Estate Profitability Index is a tool that determines whether a real estate investment property is a good buy. It requires a little more research to get a good number, but it’s a good way to make an informed decision on a rental property.

Real Estate Profit

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How to Find the Real Estate Profitability Index

Here a few things you need to know to get the right index:

  • The first year’s cash flow
  • Future years’ cash flow
  • Your initial investment

If rental properties are new to you, it’s a very good idea to seek out the help of a real estate professional with a long time reputation in the area you are considering. That person can help you figure out the cash flow on your investment. Once you have a solid number, you can find the profitability index by dividing the cash flow by your initial investment.

You want the index at one or more. If it’s less than one, then it is not a good investment. For example, a property with a cash flow of $100,000 should not have an initial investment that is more than that.

A Few Things to Consider

No savvy real estate investor buys a property without investigating everything about it. There are several things that affect your cash flow on a property:

  • Repairs
  • Unpaid rent
  • Utilities
  • The local economy

If the new landlord has expensive repairs, or irresponsible renters, the cash flow will be lower than expected. If the investor has the finances to make repairs and get better renters, then he or she can handle a weak first year. However, the future requires some expert calculations.

This is why it’s so important to work with a real estate professional that understands the market and the properties in that market. Their expertise will protect your investment well into the future.