Properly assessing real estate - The ability to properly assess potential investment properties, and turn them into cash flowing income investments, is one of the most important qualities a real estate investor can possess. Without it disaster is almost a certainty. Thankfully there is a very simple formula that any investor, newbie or seasoned veteran, can apply when on that treasure hunt for prospective real estate ventures.

Utilize your resources - On any property you ever evaluate I would strongly urge you to use a model I like to refer to as “The Trump Analyzer” for a very simple reason. Simply put, it trumps the need to get to complex in your factoring as other models would have you do. Why end up even more lost at the end than when you first began? This model is easy, simple, and best of all quick in its evaluation.

A quick word of advice before I begin - Always evaluate the numbers of any potential real estate investment before ever going to see it. It is far easier to force the numbers to work once you have become emotionally attached to a property (who doesn’t love an all brick home in a bread and butter neighborhood).

So let’s get started with the Trump Analyzer formula. It employs a few necessary factors to help any investor determine the Net Operating Income (NOI) of any property they are interested in.

The Trump Analyzer:

Gross Potential Income (GPI): Gross Potential Income is basically a perfect world projection of what the property can generate annually without allowing for any disabling factors. For example, if you have a house that can rent for $1,000 a month the GPI would be $12,000 a year ($1,000 X 12 months).

Vacancy/ Collection Losses (V/C): Most simply stated, vacancy is the percentage of time you would project the property to be vacant. There will always be times on any property you possess where market conditions, economic factors, or tenant turnovers will convert to vacancy periods. A couple of examples might be a vacation home where it has a more seasonable occupancy or a college town where students come and go each semester.

Collection losses are those periods where a tenant becomes unemployed or refuses to pay for various reasons (leading to a variety of conclusions).

Both concepts will require an annual percentage in the formula. The trick is to not state so much that it loses its potential value nor be so conservative it becomes a disaster. This, as with most of life's solutions, will become more concrete with time.

Effective Gross Income (EGI): The Effective Gross Income is the more realistic projection you feel you will receive annually on the property.

Operating Expenses (OE): Operating expenses are the dreary dues every landlord faces. These are expenses such as maintenance fees, management fees, property taxes, hazard insurance, homeowners dues, utilities (depending), and overhead replacement cost (i.e. plumbing, a/c, etc.).

Net Operating Income (NOI): Net Operating Income is what is left over (not including loans and income taxes) after paying all expenses associated with the property. This is a key determinant in any property you plan to invest in.

Annual Debt Service (ADS): The ADS is the total sum of the mortgage payments (principal + interest) that you will pay over the course of the year.

Cash Flow Before Taxes (CFBT): This is the total sum of every penny collected and paid into your property, positive or negative, before income taxes.

The Trump Analyzer model would equate as follows:

PGI – V/C = EGI – OE = NOI – ADS = Cash Flow After Taxes

A very simple yet productive model that will keep your portfolio looking sharp and producing positive income investments!

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