I received a fantastic question from my reader recently… He was wondering how I know if real estate opportunities are potentially going to be PROFITABLE.
The answer is quite simple (notice I said simple, NOT easy).
It’s math.
By the way, math is the foundation of all my financial decisions, not emotions.
So today, I will take you through some of the math I use to CONFIDENTLY make my real estate decisions.
Note that everything I’m sharing with you today is based on PERSONAL experience only.
Before investing in real estate, I expect you to do your own research and due diligence, and seek a licensed professional’s advice.*
Now let’s get started.
How I Assess the Profitability of Real Estate Opportunities
Please explain the process of your calculations on how you go about doing the math to see whether or not a property will be profitable. I watched one of your videos where you broke it down with a random spectator but I couldn’t think fast enough to follow your train of thought, sorry. – Nathan K.
Hey Nathan, thanks for writing in.
One of the most important mathematical formulas I use to see if real estate opportunities will likely be PROFITABLE is calculating the Net Operating Income (NOI) of a property. Here’s how:
NOI = Effective Gross Income (EGI) – Operating Expenses
EGI is the TOTAL amount of real income that was actually collected from the property in the last 12 months. Examples include rent, laundry, parking, etc…
Operating Expenses include the total amount of ongoing expenses from day-to-day operations on the property… EXCLUDING debt payments and one-off expenses.
You can find all these numbers on the property’s operating statement.
This is probably the second most important number to me when evaluating real estate opportunities, because:
1) You can actually see HOW profitable your property could be each year… In other words, how much income it could bring you annually before taxes.
2) You will need to show lenders that your NOI is 25% greater than your loan amount. Then they can determine if they’re WILLING to finance your deal.
3) You need this number to calculate the Cap Rate. In turn, this determines the property’s rate of return and VALUE.
4) You need to know what your NOI is at 100%, 90%, 85% occupancy – to see if your deal cash-flows enough to weather the absolute worst-case scenarios you can think of.
5) If you can increase the NOI, you could increase the price the next investor pays for your property… And you could potentially INCREASE your profit when you exit the deal.
I cover all this in greater detail in my Real Estate Success System, if you’re serious about mastering this.
I Want to Hear from You Too
You know I’m passionate about getting as MANY people into the real estate game as possible.
Everyone deserves an opportunity to build wealth that takes care of themselves and their families.
So if you have a question about multifamily investing, or you want to share a real estate success story with me, email me at cashflow@grantcardone.com today.
Be Great,
Grant Cardone
*Disclaimer: This content is intended to be used for educational and informational purposes only. Before investing, you should always do your own analysis based on your own financial and personal circumstances before making any investment. Grant Cardone is an industry expert who has been investing for over 30 years and his opinion is based solely on his own personal experience and circumstances. Individual results may vary. You should perform your own due diligence and seek the advice from a professional to verify any information on our website or materials that you are relying upon if you choose to make an investment. Investment involves great risk and there is no guarantee of performance or results.
We are not attorneys, investment advisers, accountants, tax professionals or financial advisers and any of the content presented should not be taken as professional advice. We recommend seeking the advice of a financial professional before you invest, and we accept no liability whatsoever for any loss or damage you may incur.
