How to Buy Your First Investment Property

To Analyze a Property’s Numbers

1. Transfer the numbers from the pro forma to the Real Estate Evaluator.

2. Make adjustments to the various numbers to give you several scenarios for the property. For example:

Income: Are the rents competitive? Can you increase the rents? If so, how much can you increase
them and still be competitive in the market?

Vacancy: Is the vacancy rate realistic? If it’s high, what can be done to reduce it? If you are confident
that the rate can be reduced, you may want to calculate the numbers based on a lower rate. If it’s
low, you may want to increase it to be comparable with vacancy rates in the area and get a more
realistic picture.

Other Income: Is there opportunity to add other income to the property (vending machines,
laundry, etc.)?

Expenses: As you gain more experience it will become easier to assess the expenses of a property.
Which expenses seem high and which seem low? Make adjustments.

Financing: Put in the purchase price you want to offer. What is the down payment you may be
paying? What are the loan terms—amount, term of loan, interest rate, closing costs?

Investment Analysis: Rich Dad’s Real Estate Evaluator™ calculates cash on cash return for two
different financing scenarios: with settlement fees paid by the buyer at settlement, and with
settlement fees added into the loan amount. Is there a significant difference? If so, keep this in
mind as you arrange financing.

You will see that as you change any or all of these numbers, your analysis will also change. On the electronic
worksheet at the rich dad web site, the cash flow and cash on cash return will be automatically calculated for you.

So work the numbers, be creative, and create a financial strategy that makes the investment work for you.

Have fun with it and learn!

Definitions: You’ll Need to Know

Pro forma: A projected financial statement based on anticipated, not actual, income and expenses.

Cash on cash return: A percentage figure determined by dividing the annual cash flow for a
property by the actual cash you invested. (This could include down payment, closing costs, and
fix-up expenses.)

Deferred maintenance: Necessary repairs and upkeep that have been left undone by the
seller. Maintenance that has been deferred can represent an opportunity in a deal, allowing
you to negotiate a lower price.

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