Treat Your Rental Property as a Business

The purchase of residential real estate as an income earner is proving to be a lucrative business in Jamaica. Whether you choose to rent long term or short term, you will likely profit from your investment. If you operate the enterprise and analyse its results with some basic business principles, you will gain a much deeper insight and a clearer picture of where you are heading. However, if you don’t analyse your operation, you may mistake losses for what seem like profits or have no clear strategy direction for your property investment. Sadly, too few owners reap the rewards from operating their property investments as a business with medium and long-term goals.

What’s Your Return on Investment?

A property investment analysis report will allow you to see information such as cash flow projections, net operating income, and internal rate of return, among other examples. Why do you need this information? First of all, these reports may answer some of the initial questions your bank financier asks when you seek a loan to increase the number of rooms or buy a new investment property. As an home owner you should at least know what is being calculated, even if you don’t know how to produce a report. I use inexpensive, user-friendly software to produce my reports. Many qualified consultants or accountants also specialize in offering such services.

How to create a property investment analysis report is beyond the scope of this blog. Instead, I will introduce you to some of the labels that make up a typical  financial analysis report of a rental property. Here are a few labels that you need to know about:

  • Purchase Price: The price stipulated in the contract or Agreement for Sale of the property
  • Loan Terms: For example, a mortgage at 25 years at 7.5%
  • Closing Costs: Legal costs, government taxes and fees
  • Recurring Annual Expenses:  Aexpense that is automatically generated again and again at set intervals, in this case annually.
  • Annual Rent Growth: The projected trend of market rental rates over an annual period of analysis.
  •  Initial Cash Investment: That which is paid into a project at the beginning.
  • Capital Appreciation Rate: An increase in the value of an asset or investment over time.
  • Net Operating Income:  A calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses.
  • Estimated Market Value: The most probable sale price of a property in terms of money in a competitive and open market.

Treat your residential property investment as a business and benefit from the insight and control you will experience in all areas  of its operation.