Using a Rental Property Financial Analysis Form

A financial analysis form is used by prudent landlords and real estate investors to evaluate the financial health and performance of a rental property. It will reveal, on paper, the income, expenses and cash flow of a property. This information is certainly required in order to make wise investments that will provide the best return on your invested dollars.

In addition to using it for evaluating a new rental property investment, the analysis form will also let you know how well any of your existing properties are performing as well. It's really a "one-size-fits-all" tool for analyzing rental property.

The main benefits of using a financial analysis form are that it reveals the cash flow, return on invested capital, and taxable income that is produced by an investment property. And these are important criteria since investing in rental property ultimately boils down to "dollars and cents".

Learning how to properly use the form will make you an informed and knowledgeable rental property investor. Like a doctor using a stethoscope to determine the condition of a patient, you'll use the financial analysis form to determine the health of a rental property investment.

The format of the basic analysis form consists of three primary sections�

An Income section - This is where the effective annual gross income of the property is determined after accounting for vacancy and collection losses.

An Expense section - The operating expenses of the property are listed in this section and added up. The resultant total annual expense is then subtracted from the property's annual income (from the first section) to provide the annual "net operating income" for the property.

The Cash Flow and Taxable Income section - In this final section, the annual mortgage payment is subtracted from the property's net operating income to yield the property's annual "cash flow". Mortgage principal is then added to the cash flow to yield the annual "gross equity income" for the property. Finally, the annual "depreciation" taken for the property is subtracted from the gross equity income to provide the annual "taxable income" for the rental property.

As can be seen from the above description, all that is needed to complete the form is accurate income, expense, mortgage and depreciation data for the property along with basic math skills (addition and subtraction).

The results of the form are only as accurate as the data that is used - the old garbage in equal's garbage out syndrome definitely applies. Therefore, when using the form to evaluate a property for purchase, it is extremely important to verify all income and expense figures supplied by the seller or seller's agent.

Sometimes, in an effort to inflate the sales price, unethical sellers can increase actual income and decrease actual expenses, making the property appear to have a greater cash flow than it actually has. So, make sure you first verify all figures provided before moving forward.

For more in-depth information and examples on how to use a rental property financial analysis form, please visit The Landlord's Library book collection. It's a terrific, one-stop source for practical, comprehensive information on the entire subject of residential landlording.

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