Any individual investor who has a successful real estate
investing business knows to never rely on the advice of
others or strictly upon the numbers given about a property.
Once a prospective real estate investment is located, a
close examination of the rental property's income,
expenses, cash flow, rates of return, and profitability are
always conducted.

Regardless what overzealous agents or sellers say, vigilant
real estate investing demands that the numbers are
validated.

To achieve this, smart investors rely on a variety of
reports and rates of return to measure an income property's
financial performance. And we'll consider several of these
reports and financial measures in this article.

Reports

The most popular report used in a rental property analysis
is perhaps the Annual Property Operating Data, or APOD.
This is because an APOD gives the analyst a quick
evaluation or "snapshot" of property performance during the
first year of ownership. Although tax shelter isn't
considered, an APOD can serve as the realestate equivalent
of an annual income and expense statement if done correctly.

A Proforma Income Statement is also popular amongst
analysts. Although comprised of speculated numbers, a
proforma provides a useful way for real estate investors
and analysts to evaluate an investment property's future,
long-term cash flow performance. Proformas regularly
project numbers out over a period of ten to twenty years.

Certainly one of the most important documents for an
investment analysis is the Rent Roll. This is because a
property's sources of income and income stream are vital to
making wise investment decisions. A rent roll typically
lists currently occupied units with current rents along
with vacant units and market rents. Rents shown in the rent
roll should, of course, be confirmed by the tenants during
the due diligence period.

Rates of Return

Capitalization rate, or cap rate, is one of the more
popular rates of return used by investment analysts. This
is because cap rate offers a quick first-glance look at a
property's ability to pay its own way by expressing the
relationship between a property's value and its net
operating income. Cap rate also provides real estate
investors with an easy method for comparing similar
properties.

Cash-on-cash return measures the ratio between a property's
anticipated first-year cash flow to the amount of
investment required to purchase the property. Though cash
on cash return does not account for the time value of money
or for cash flows beyond the first year, this shortcoming
is often overlooked because it does provide an easy way for
individual investors to compare the profitability of
similar income-producing properties and investment
opportunities quickly.

Internal rate of return is more difficult because it
requires a computation for time value of money which in
turn requires a financial calculator or good real estate
investment software. Nonetheless, it is widely used by
analysts because internal rate of return reveals in
mathematical terms what an investor's initial cash
investment will yield based on an expected stream of future
cash flows discounted to equal today's dollars. In other
words, internal rate of return converts tomorrow's dollars
to today's dollars and then computes your return on
investment.

Here's the point.

If you're planning to make an investment in real estate, be
sure to do your homework and conduct a thorough real estate
analysis. Create the reports and returns so you can examine
them in the light. This is the only reasonably certain way
of making the right investment decision on any prospective
real estate investment. If you do your property analysis
correctly, you'll know whether the investment makes good
financial sense (or not) and almost certainly guarantee
your real estate investing success.