Investment Analysis and Property Evaluation

The Numbers Behind Every Deal

In the previous lesson, we explored client communication and lead nurturing. Now let’s build on that foundation. A client calls. “I found a duplex listed at $425,000. The seller says it rents for $3,200 a month. Is it a good investment?”

Most agents say “sounds good” or “let me check the comps.” An AI-powered agent says: “Let me run the full analysis. I’ll have the cash flow projection, cap rate, cash-on-cash return, and five-year outlook to you by tonight.”

That’s the difference between an agent who facilitates and an agent who advises. This lesson teaches you to be the second kind.

Investment Analysis Fundamentals

Before running AI analysis, understand the key metrics:

Cap Rate (Capitalization Rate)

What it measures: Property return independent of financing. How the property performs on its own.

Formula: Net Operating Income / Purchase Price

Example: $30,000 NOI / $425,000 purchase = 7.06% cap rate

When to use: Comparing properties to each other, regardless of how they’re financed.

Cash-on-Cash Return

What it measures: Return on the cash you actually invested.

Formula: Annual Pre-Tax Cash Flow / Total Cash Invested

Example: $7,200 annual cash flow / $105,000 down payment + closing costs = 6.86% CoC

When to use: Evaluating how hard your cash is working, considering leverage.

Total ROI

What it measures: Complete return including cash flow, appreciation, and equity buildup.

Includes: Cash flow + principal paydown + appreciation + tax benefits

When to use: Long-term investment decisions, comparing real estate to other investments.

Running a Complete Investment Analysis

Step 1: Gather the Data

I'm analyzing an investment property. Help me identify
what data I need to collect:

Property type: [SFR, duplex, multifamily, commercial]
Location: [city/neighborhood]
Listed price: [amount]

Create a data collection checklist:
- Property details needed
- Financial data needed (current and projected)
- Market data needed
- Cost estimates needed
- Financing assumptions needed

Step 2: Run the Numbers

Analyze this investment property:

PROPERTY:
- Purchase price: [amount]
- Property type: [type]
- Units: [number]
- Square footage: [total]
- Year built: [year]
- Condition: [description]

INCOME:
- Current monthly rent (per unit): [amounts]
- Market rent (per unit): [if different from current]
- Other income: [laundry, parking, storage]

EXPENSES (annual):
- Property taxes: [amount]
- Insurance: [amount]
- HOA/condo fees: [if applicable]
- Utilities (owner-paid): [amount]
- Property management: [% or amount]
- Maintenance reserve: [% or amount]
- Vacancy allowance: [% — use local market rate]

FINANCING:
- Down payment: [% and amount]
- Interest rate: [current rate]
- Loan term: [years]
- Closing costs: [estimated]
- Points: [if any]

Calculate:
1. Monthly cash flow (income - expenses - mortgage)
2. Annual cash flow
3. Cap rate
4. Cash-on-cash return
5. Gross rent multiplier
6. Debt service coverage ratio
7. Break-even occupancy rate
8. 5-year projection (with assumptions for rent growth
   and appreciation)
9. Total ROI at 5 years (including principal paydown
   and appreciation)

Step 3: Sensitivity Analysis

This is what separates professional analysis from back-of-napkin math.

Using the investment analysis above, run sensitivity
scenarios:

BASE CASE: [the numbers you calculated]

PESSIMISTIC SCENARIO:
- Vacancy: +3% above base
- Rent growth: 1% below base
- Maintenance: 25% above estimate
- Appreciation: 1% below base

OPTIMISTIC SCENARIO:
- Vacancy: 2% below base
- Rent growth: 1% above base
- Maintenance: at estimate
- Appreciation: 1% above base

STRESS TEST:
- What vacancy rate makes cash flow negative?
- What interest rate makes the deal not work?
- What purchase price achieves a 10% CoC return?
- How long until break-even if vacancy doubles in year 1?

Present all three scenarios side by side.

Mortgage Comparison Analysis

Buyers often don’t understand how different loan structures affect their total cost. AI makes this comparison clear.

My client is considering these financing options:

Option A: [loan type, rate, term, down payment, points]
Option B: [loan type, rate, term, down payment, points]
Option C: [if applicable]

Property price: [amount]

Compare all options:
1. Monthly payment (P&I)
2. Total monthly with taxes and insurance
3. Total interest paid over the loan term
4. Break-even point for points vs. no points
5. How much buying power changes between options
6. 5-year total cost comparison
   (for clients who might refinance or sell)
7. Which option is best for:
   a) The client who's staying 5 years
   b) The client who's staying 10+ years
   c) The client who wants the lowest monthly payment
   d) The client who wants to pay the least total interest

Quick check: Before moving on, can you recall the key concept we just covered? Try to explain it in your own words before continuing.

Value-Add Property Analysis

For investors considering renovation opportunities:

Analyze this value-add investment opportunity:

CURRENT STATE:
- Purchase price: [amount]
- Current condition: [description]
- Current rent (or potential rent as-is): [amount]

RENOVATION PLAN:
- Renovation budget: [estimated cost]
- Renovation timeline: [months]
- Post-renovation rent: [projected]
- Post-renovation value: [estimated ARV]

Calculate:
1. Total investment (purchase + renovation + holding costs
   during renovation)
2. Equity created (ARV - total investment)
3. Return on renovation dollars
4. Cash flow comparison: before vs. after renovation
5. Time to recoup renovation investment from increased
   cash flow
6. Risk factors: what if renovation costs 25% more?
   What if rents don't increase as projected?

Presenting Analysis to Clients

The Investment Summary

Don’t hand clients a spreadsheet. Give them a story.

Based on this investment analysis: [paste your numbers]

Write an investment summary for my client that:
1. Opens with the investment thesis (1-2 sentences:
   good deal or not, and why)
2. Presents the key numbers in a clear table
3. Explains what the numbers mean in plain language
4. Highlights the main risks and how to mitigate them
5. Includes the sensitivity analysis in a simple
   "best case / expected / worst case" format
6. Ends with a clear recommendation

Tone: professional, transparent, helpful.
Avoid jargon without explanation.

The Comparative Property Analysis

When an investor is choosing between properties:

My investor client is comparing these properties:
Property A: [key details and financial summary]
Property B: [key details and financial summary]
Property C: [key details and financial summary]

Create a comparison that:
1. Summarizes each property in 2-3 sentences
2. Compares key metrics side by side
   (cap rate, CoC, cash flow, appreciation potential)
3. Identifies which property is best for:
   - Cash flow priority
   - Appreciation priority
   - Lowest risk
   - Best overall return
4. Notes the non-financial factors
   (management difficulty, tenant quality, location trend)
5. Gives my honest recommendation with reasoning

Portfolio Analysis

For clients with multiple properties:

Here's my client's current portfolio:
[List each property with purchase price, current value,
mortgage balance, monthly cash flow, cap rate]

Provide a portfolio analysis:
1. Total equity position
2. Overall portfolio cash flow
3. Weighted average cap rate
4. Diversification assessment
   (geography, property type, price range)
5. Which property is the strongest performer?
   Which is the weakest?
6. Should they sell anything to optimize returns?
7. What type of property should they acquire next
   to strengthen the portfolio?

Exercise: Analyze a Real Property

Find an investment property currently listed for sale in your market (or use one you know):

Collect the data (use the checklist from Step 1)
Run the full investment analysis through AI
Create the sensitivity analysis with three scenarios
Write the client-facing investment summary
Verify all calculations manually or with a spreadsheet

Compare your AI-assisted analysis to how you’d have done it manually. The analysis quality should be similar, but the speed dramatically different.

Key Takeaways

Investment analysis requires multiple metrics: cap rate, cash-on-cash return, and total ROI each tell different parts of the story
Always run sensitivity analysis: projections are only as good as their assumptions
AI accelerates the math; you provide the judgment about market conditions and risk
Present analysis as a narrative first, numbers second; lead with the investment thesis
Mortgage comparison helps clients understand the true cost of financing options
Value-add analysis must account for renovation risk (cost overruns, timeline delays, rent uncertainty)
Verify every AI-generated calculation; financial errors in real estate cost real money

Next lesson: marketing campaigns and lead generation. How to attract clients with AI-powered marketing.