So, you eventually found a motivated seller. So you went to check the property. The owner is ready to sell you the house for $30,000 less than what you believe it will appraise for. Isn’t that a terrific deal?

Maybe, maybe not. There’s a lot more to real estate investing and deal analysis than simply comparing what you can obtain a home for and what you think it can appraise for. If you wish to disagree with me, I have practically lots of homes that I can sell you for $30,000 or more below latest appraisal value that I will not touch.

Now, don’t take it the wrong way… I’ve bought houses with tons of equity; and simply because of the equity before. However, I wouldn’t buy houses that have tons of equity with particular exit strategies.

For instance, I won’t buy houses just because they have a great deal of equity if I am going to rent it long term UNLESS (and it is a BIG unless) it generates positive cash flow. It makes sense, doesn’t it? Who wants to fee a home $100, $200, $300 or up every month? Even if it has $30,000 in equity, feeding negative cash flow properties is going to eat you alive.

This is why I propose examining deals based more than simply on equity. I very strongly suggest my customers and other real property investors to use Net Operating Income. Net Operating Income, in my view, is the only real method to ascertain what you can really afford to make payments on a house as an investor in real estate.

Never heard of Net Operating Income? Well, get your preferred drink and sit back. It is among the best tools for dissecting deals and it is easy to calculate.

Below is a quick break down of how you can compute for Net Operating Income for a property:

1. Determine what the market rent is.

2. Subtract a margin for vacancies.

What remains is what we call Net Rent.

3. Add up all the expenditures which include taxes, insurance, management, a reasonable estimate of upkeep, HOA, utilities, and so forth EXCLUDING your mortgage payment.

4. Subtract all the expenditures from Net Rent.

The figure that remains when you have subtract all your expenditures excluding your debt or mortgage payment is what is referred to as Net Operating Income.

The Net Operating Income will give you an idea of exactly how much debt the house can truly afford. If we know what interest rate we can obtain on a loan and the duration of the loan, then you can plug in the Net Operating Income as the payment and any good fiscal calculator can tell you the most you are able to afford to pay for the home with the Net Operating Income as the payment.

So, when you present your offer to a property seller, you can sit down with them, present to them what the real expenses are for the home and what you expect to receive in rent and tell them why you are able to pay what you can.

Forget about making offers at 70% of value without being able to justify a silly price… when you make an offer grounded on Net Operating Income, you will be able to very distinctly present to any home seller why it is that you are only able to pay only your price.