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Subjective vs. Objective analysis using a point system

Using a system to analyze deals is of paramount importance. It can't be overstated. But it's easy to get hooked into only looking at the numbers without considering some of the more subjective data. For example, even though building A might show a 20% return vs. building B's 15%, what's it going to be like owning building A? Are there issues that just don't show up on a spreadsheet? Maybe it cash flows better, but you have to show every apartment a dozen times because the bathrooms are too small, or you have to go through a bathroom to get to a bedroom, whereas building B is always full. This might be a situation where you're paying for those five percentage points of return with fifty percent more hassle and headache. Investibility should be judged within the bigger context of many variables. By this, I mean that a lower return might be acceptable if you have such a great building that tenants never move out. What I do to put all these variable into perspective is to have a chart where I score the properties using a rental property "point system" that includes financial targets as well as more subjective qualities:

Point System: Non-financial

(Choose "perfect" or "decent")
"Perfect" neighborhood = 2 points
"Decent" neighborhood = 1 point
Bad parking = -1 point
Great layouts = 1 point

(Quality of tenants: choose "good tenants" or great tenants")
Attracts good tenants = 1 point
Attracts great tenants = 2 points
Great condition = 1 point
Great owner's unit = 1 point

Financial (Score one point for each threshold reached)
COC > 10% 1 point
ROIE > 20% 1 point
COC > 15% 1 point
ROIE > 25% 1 point
COC > 20% 1 point
ROIE > 30% 1 point
*COC = "Cash-on-cash Return," ROIE = "Return On Initial Equity"

This is a very handy scoring system when you're looking at many buildings that may have different qualities but similar numbers. For example, you're looking at an old eight unit in a class C area, a beautiful upper class B duplex and a house. They all show 10% cash-on-cash return and 15% return on initial equity. This point system can help value the properties subjectively based on what's important to you. You can tweak it a bit so that things that are more important to you score higher. For example, if you absolutely know you want to sell one day, then you'd rank items higher that will appeal to a future buyer, like "Attracts good tenants" and "great owner's unit."
Like what you've read about analyzing properties subjectively as well as objectively? If you're hungry for more, see our purchase options below. We think you'll earn back the money you spent on this package with your first deal.


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