AI Can Calculate the Return on a Rental Property. The Hard Part Comes After That.

By ProfitWise - a Visa Business Plans company

Real estate investors have always loved numbers, and for good reason. Before buying a property, you can calculate expected rental income, operating expenses, financing costs and the return you hope to earn.

Today, technology can make that analysis remarkably fast. Give an AI tool the right information and it can help calculate cap rates, cash-on-cash returns and different financial scenarios in seconds.

That’s useful.

But anyone who has owned investment property for a while knows that the calculation is usually the easy part.

Imagine you’re considering a small multifamily property. On paper, the numbers look great. The rents support the asking price, expenses appear reasonable, and the projected return meets what you were looking for.

Then you start looking more closely at the assumptions behind those numbers.

The current rents may be accurate, but perhaps two tenants are paying considerably above what similar units in the neighborhood are getting. The repair budget may look reasonable until you learn that several air-conditioning units are nearing the end of their useful life. Insurance may be based on the seller’s current cost, while the quote you’ll receive as the new owner could look very different.

The calculation wasn’t wrong. The assumptions changed.

That’s where judgment starts becoming much more important.

At ProfitWise, when we look at an investment with a client, we don’t stop at the return a spreadsheet produces. We spend time understanding what went into that return calculation.

Maybe the projected rent increase looks reasonable. But how long has it actually taken the investor to fill similar units in that area? Are repairs being estimated based on what the property has historically cost to maintain, or is someone using a convenient percentage? If the investor is planning renovations, how long will those units be unavailable while the work is being done?

Those are the conversations that put the numbers into context.

And they don’t end when the property is purchased.

In our monthly meetings with real estate investor clients, we can compare what is actually happening with what was expected. Perhaps repairs have been running higher for several months. Maybe one property is consistently producing better margins than the others, or vacancies are taking longer to fill than they used to.

Sometimes the numbers lead to a very practical conversation. Is it worth putting additional money into a property? Does the rent still make sense relative to what the unit is costing to operate? Is one investment tying up cash that could be better used somewhere else?

Knowing the investor matters too.

Someone building a portfolio for long-term appreciation may look at those decisions very differently from an investor who depends on the properties for current income.

At ProfitWise, we’re not looking at each month’s financials in isolation. Over time, those monthly conversations give us a much better understanding of the properties, the investor’s strategy and what they’re trying to accomplish. That context becomes particularly valuable when a new opportunity comes along.

Financing adds another layer.

Two investors can look at exactly the same property and reach different conclusions depending on how they’re buying it. The interest rate, down payment, loan terms and amount of cash the investor wants to keep available can materially change the economics of the investment.

Then there are decisions that don’t fit neatly into a formula.

An investor may accept a lower initial return on a property with significant potential to increase rents or improve operations. Another may prefer stronger income immediately. Both can be reasonable decisions. What makes sense depends on what the investor is trying to accomplish and how that particular property fits within the rest of the portfolio.

This is where financial analysis becomes more than running calculations.

AI can help us test scenarios faster and process a tremendous amount of information. But a sophisticated calculation is only as useful as the assumptions behind it.

Experience helps us know which assumptions deserve a closer look. Working with an investor month after month adds something else: an understanding of how their existing properties are actually performing, how they approach risk and what they’re trying to accomplish with their portfolio.

So when that investor calls and says, “I found another property. Can we look at it?” we’re not starting from zero.

We already know the story behind the numbers.

Get More From Your Numbers