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Real Estate Valuation and Analysis for Investors

From Christopher Smith, for About.com

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Rate of Return as a Quantitative Real Estate Investment Analysis Tool

Cashflow, in turn, will allow you to calculate the property’s expected rate of return (ROR). Rate of return is a measure of profitability; it measures the cash that a project will generate vs. the cash that you have to put into the project.

You’ll need a spreadsheet or a real estate evaluation software to calculate this ratio. I think it’s highly useful because it allows me to compare the return I’m expecting for the investment vs. the return I would reasonably expect for other, dissimilar investments. For example: if I ran the numbers for the property I described at the beginning of this article and it kicked back to me a rate of return of 8% I’d surely pass.

I can expect to get 8% investing on the stock market (lower risk, and a whole lot less effort). For the risk and effort I’d have to put into this project I’d expect a rate of return well north of 20%.

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