Real Estate Deal Check:

Ideally, a simple check would be to run your cap rate and compare it to your mortgage interest rate.

This builds a "spread" and you know how much the property generates in return relative to your cost of debt (interest rate).

A wider cap rate to interest rate spread means that the returns are relatively high but the cost of using debt is low.

You still need to assess the risk of the deal but this is a good quick calculation to run.

A deeper calculation would be to run your debt yield relative to the loan constant

Debt yield = NOI / loan amount
Loan constant = principal + interest payments / loan amount

Even though the principal will be returned to you in the future in the form of equity, you still pay it

Equity is locked until you pull it out (refinance) or sell the property off.

So, this is an opportunity cost to me - that is why I build a spread between debt yield and loan constant to get a clearer picture of the investment and its "true" costs.

I'll run through this in more depth during part two of my series - it's an interesting topic and I believe a foundation in real estate financial analysis sets investors apart.

Build your foundation now.

Form a disciplined approach.

It is well worth the effort.