You must be able toobtain suitable financing on the property for it to be a good deal.
The type offinancing available, specifically to you, can make the property more or lessdesirable.
What may be a good deal for someone else may be a bad deal for you.
This is usually determined by the type of financing that youare able to obtain to purchase the property.
Do not accept financing that is soexpensive that it will produce a negative cash flow just because it is the onlyfinancing that you can qualify for.
If you can afford the negative cash flowand are sure that you will be able to qualify for a more reasonable loan thatwill allow the property to produce a positive cash flow in the near future, thepurchase may not be such a bad idea.
The main point is, if you cannot hold onto the property with financial comfort, whether or not it would be a great dealfor someone else who can obtain better financing, it is not a good deal foryou.
The next section will go into detail on some of the best ways to finance rentalproperties.
The type of financing you are able to obtain will alsoaffect your ROI, or return on investment.
The ROI determines the rate of returnan investor will earn on the amount he was required to put down in order toobtain the property.
This rate is calculated by dividing the property's annualnet income by the investor's down payment.
For example, if a property's netincome is $4,000 per year and the investor puts down $2,000 to acquire theproperty, then his ROI is 200 percent, ($4,000 / $2000 = 200).
If he did nothave to come in with a down payment in order to acquire the property, then thereturn on his investment is infinite.
You cannot get this type of return byplacing $2,000 into a savings account at your bank.
The investment that offersthe highest ROI without significant risk is the best place an investor can puthis money.
The higher your ROI, the greater your positive cash flow.
In real estate, there are two types of ROIs: Simple ROI: Thisis when the ROI is determined by taking into consideration the annual cash flowthat the property produces without taking into consideration the property'sappreciation, average annual rent increase, and principal payments being paidfrom the tenants' rents.
Complex ROI: ThisROI does include a property's appreciation, rent increase and principalpayments, as well as the property's annual cash flow.
To fund this, you add thedollar amount of the average annual appreciation, average annual rent increaseand average annual principal payments into the net income before dividing theproperty's annual net income by the investor's down payment.
The average annualappreciation and rent increase depends on the area.
You can find out what theseaverages are through the area demographics often found on the Internet, inlocal real estate offices and at property management companies.
Once you havethese percentages, multiply the appreciation rate by the purchase price of theproperty to determine the property's amount of annual appreciation; thenmultiply the rent increase percentage by the property's gross annual rents todetermine the amount of annual rent increase.
To determine the average annualprincipal payments, just divide the entire loan amount by the number of yearsit will take before the loan is paid off.
Now you are ready to calculate theComplex ROI.
For example, if the property's annual net income is $4,000, itsaverage annual appreciation is another $4,000, the average annual rent increaseis $320 and the average annual principal being paid off is $3,333 then the ROIis $11,653 ($4,000 + $4,000 + $320 + $3,333) divided by $2,000 (the downpayment) = 582.
6 percent per year.
Wow! This is the most accurate determinationof an investor's return on investment.