Once you've successfully navigated through the due diligence phase and decided to proceed, the next step in your real estate investment journey involves understanding your investment's potential to yield substantial income. This third article in our investment series will guide you, step by step, through a "quick and dirty" yet effective analysis of a prospective multi-family rental project that's yet to be built.
While key factors such as hard costs, soft costs, per-square-foot lease rates, and operating expenses may vary depending on your property's location and specifics, the methodology for these calculations remains consistent.
To facilitate a better understanding of these calculations, we've provided an Excel file for you to download. This file will allow you to follow along with the calculations described in this guide, and enable you to modify them to fit your unique project parameters.
Once you open the Excel file, you'll see a spreadsheet that mirrors the table above. Replace the pre-populated figures with your projections, including the number of multi-family units you plan to rent, the average size of these units, and the monthly lease rate per square foot.
If your project involves various types of units with differing sizes, you can add additional rows beneath the "Unit Size" cell and input the corresponding square footage for each type of unit.
To determine the revenue for diverse unit types, use the following formula: Multiply the average size for each unit type by the anticipated monthly lease rate per square foot. Multiply the result by 12 to get your annual revenue.
This formula stays the same whether you're calculating revenues for one unit type or for several. For example, in the Excel file, the total project square footage (cell C16) is multiplied by the efficiency rate (cell C8) to provide an overall estimate of the project's leasable square footage (cell C17). This leasable square footage (cell C17) is then multiplied by the monthly lease rate per square foot (cell C10), and then by 12, to derive the total annual revenue (cell F4).
Conclusion: By following this method, you'll be well-equipped to make informed decisions about the potential profitability of your real estate investments. Remember, each project is unique and will present its own set of challenges and opportunities. Adjust your calculations and expectations as necessary to accommodate these unique factors.
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