If you think property in Spain, Ireland or another foreign country is an absolute bargain, yet you have no money to purchase a property there, do your research
What are the main metrics that real estate investors look at when deciding in which property to invest?
It really boils down to one thing, CASH FLOW. Buy property with solid cash flow, with good tenants in a good location and manage it well.
In real estate it’s “Location, Location, Location,” because location will affect your cash flow.
Real Estate investors use a figure called Cap Rate when evaluating investments. Cap rate is the rate of return that you would receive on the property with no debt. The formula is annual net operating income/cost. Net operating income (NOI) is the number you are looking for when evaluating a property. NOI is calculated by deducting from the annual revenue (rents) all expenses associated with operating the property (Property taxes, insurance, maintenance, utilities, cleaning, marketing, leasing fees, etc).
For example, let’s say you derive that a property has NOI of $10,000 and the price is $200,000, then the cap rate on that property is 5%. That means that this investment yields an un-leveraged 5% return. If the price of the property dropped to $125,000 then the cap rate on that property would be 8%.
Most investors have a set return, or cap rate, that they will use to underwrite real estate investments. In that same example where the NOI is $10,000, if an investor decided that he/she would not accept a return lower than 7%, he she would not pay more than $142,857 for that property ($10,000/7%).
That’s a simplified version but it comes down to what is the cash flow and what return am I willing to accept.