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Analyzing Rental Properties = The Simply Do It Way – Explained

Posted by Powered by Simply Do It on January 31, 2024

Rental properties typically don't show their best performance on in the first and second years. 

Usually, after the second year, they start to improve. 

If we grasp this and plan to hold onto the property for at least five years, it's probably better to analyze its financial performance to align with our intended holding time or more.

There are two ways to approach this analysis. 

The first, simpler method, involves looking at the income and expenses of the first year and subtracting the expenses from the income.

The second, our more thorough analysis takes the simple approach and incorporates additional assumptions that are challenging to calculate in a one-year analysis, like in the “simpler method.” In this approach, we spread all the assumptions about renting, expense increases, vacancies, expenses related to vacancies, and other factors over 30 years – specifically: year one, year two, year three, and so on, up to year 30. Each year calculates the changes in expenses, income, mortgage balance, etc. Once we have this spread over 30 years, we can draw periodic averages for different periods, using five, 10, 15, and 20 years. Then, we calculate the average performance of the property per year based on the five years' performance, and so forth.

I hope this clarifies the method.

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