How to Perform a Break Even Analysis for Real Estate Investments

When buying real estate as an investment, it’s important to understand not only the potential return on your initial investment but also how much risk you’re taking on. A break-even analysis for real estate investments is one of the best ways to measure risk and understand your return on investment. This analysis helps you determine what price you need to sell the property for in order to breakeven on the purchase and all the operating costs. By knowing this upfront, you can make better decisions about financing and what price range makes sense for a profitable venture. Here is more insight on how to perform a break-even analysis for real estate investments.

What is a Break-Even Analysis for Real Estate Investments?

A break-even analysis is used to determine the sales price of your property, so that you break even on all your expenses. This analysis gives you a better idea of the risks involved with your investment and helps you determine what price you need to sell the property for in order to breakeven on the purchase and all the operating costs. By knowing this upfront, you can make better decisions about financing and what price range makes sense for a profitable venture. You can use real estate investment software to perform a break-even analysis for real estate investments.

Why Performing a Break Even Analysis is Important

Performing a break-even analysis for real estate investments is important for a few reasons. First, it helps you determine the price range of your property so that you are profitable if you sell it. Second, it helps you understand the level of risk involved with the investment by showing you the breakeven point. Finally, it helps you determine the amount of financing you might need, which can affect what price range you buy in. For example, if an investment property needs $10,000 in repairs and you don’t have that cash on hand, you may need to obtain a hard money loan to cover the costs.

Finding the Operating Costs for your Investment

When conducting a break-even analysis for real estate investments, the first step is to understand the operating costs for your property. You should include all potential expenses related to the property, regardless of whether they have been incurred. For example, if you’re purchasing a rental property, you’ll want to include all the expenses related to the purchase. These include the down payment, closing costs, repairs, and any financing costs you might incur. You should also include the expected yearly maintenance costs. There are a couple of ways to find the cost data for your investment. You can use a site like costbuilder.com to input the details of your investment and see estimated costs based on your location. Or you can find sources for your city and input the details.

Determining the Net Assets and Return on Investment

Next, you’ll need to determine the net assets of your investment. The net assets are the total assets of the property minus the total operating costs. Let’s say you purchased a house for $100,000 with a down payment of $25,000 and financing of $75,000 at 5% interest. The closing costs associated with the purchase are $5,000 and the expected yearly maintenance for the property is $1,000. Your total operating costs are $6,000, leaving you with a net asset of $92,000. Your return on investment is your net asset divided by your total investment. In this scenario, your return on investment is $92,000/$100,000, or 92%.

Summing up

Performing a break-even analysis for real estate investments is a critical step in determining what price range you should be looking at when purchasing a property. It helps you understand the level of risk involved with the investment by showing you the breakeven point. It also helps you determine the amount of financing you might need, which can affect what price range you buy in. By knowing these numbers upfront, you can make better decisions about your investment and avoid costly mistakes.