How to analyse a deal

Togather analyse a Deal

There are many alternative ways in deciding the profitability of your property investment.

Increasingly you will find investors achieve varying degrees of profitability from their investments, ranging from 10% profit levels to deals realising 30% and above. It becomes very individual to each investors requirements.

There are a number of basic questions which need to be answered to fully understand the makings of a profitable investment.

Question 1

Can I borrow money from a lender to make the purchase? For a Buy-To-Let mortgage to be approved an assurance on approximately 130% rental coverage is needed. At this point you need to contact local letting agents to receive their assessment on rental valuations, after which your mortgage broker can calculate the sustainability of the monthly mortgage repayments required to purchase the property at the present market value.

Question 2
Do I have the required 15% deposit available? 

You will be required to provide a 15% deposit to meet the 85% loan to value. This can be provided either as a cash amount or as 15% equity in the property.

Question 3
Is the property 20% or more below market value?

Majority of the profit made on an investment is through the purchase.
You may need to negotiate the purchase price to at lease 20% BMV. Should you need to, this will allow you to release the equity out of the property at a later date to realise as much of your investment in cash as possible. This will increase my ROI (Return On Investment). Should you decide to sell up anytime in the future, there should be a healthy profit after tax.

Question 4
Will I be able to sell the property quickly?
You need to research the area to establish that should you wish to sell quickly, will you be able to do so? This is important as you may want to release the funds from the investment to purchase further properties.

Question 5
Will I be able to rent the property quickly?
You need to also research the rental market to establish that should you wish to let the property, will you be able to do so? This is also important as you may want to rent the property out over a period of time to benefit from a positive cashflow.

Question 6
What will be my cash-on-cash return?

When calculating the cash-on-cash return to establish your ROI, you should usually plan for at least 25% ROI – anything more is a bonus.

Question 7
When will I break even?
Taking into consideration the number of months or years, calculate the length of time it will take you to recover the cash injected into the property including deposit, purchase costs, refurbishment etc.
Keep your cash flow forecast positive yet realistic.

Question 8What is the Net Yield?
When calculating the net yield, anything less than 4% will prove cash flow to be minimal and not worth investing in for rental purposes. The answers to the previous questions will need evaluating in detail. A positive or negative picture will form to help you decide whether the property is worth the investment.

Use your time productively, viewing properties that do not stack up can waste an awful amount of time. Request the relevant information from estate and letting agents, together with your own research.
This will save you time and money. Prior to viewing potential property investments use the information to calculate the profitability, thus you’ll only be viewing properties that have potential profit. This may well prove crucial in the future as you progress as a property investor when you will be dealing with multiple investments in building your portfolio.