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Prior to my departure from the U.S., many of my friends and acquaintances couldn’t believe what I was doing: leaving a secure job with a good salary and great retirement to live in the 3rd world with a “lower standard of living,” while simultaneously investing in real estate.  Had I lost my mind?  Well, I could write an entire article on how, while my cost of living has dramatically decreased, my standard of living has in fact increased, but I digress.  The purpose of this article is to give the reader a taste of something a little different.

Before we embark on our journey to financial freedom, let’s learn a few basic terms:

Capital gain- The increased value of a property over time (the difference between the purchase and the sale price of the property is the capital gain)
Cash-flow- Your income after all expenses are paid.
Cash on Cash return (CCR)- The return on your investment, expressed as a percentage.
Down Payment- the money you have to take out of your pocket to make the purchase (often 20% of the purchase price + closing costs)
Expenses- Anything that takes money out of your pocket (mortgage, insurance, maintenance, vacancies, upgrades, taxes, etc)
Gross operating income (GOI)- Total income, anything that puts money into your pocket (typically derived from rent, washing machines, storage units, parking, etc)
Net operating income (NOI)- Gross operating income minus total expenses.
PITI- Principle, interest, taxes & insurance (the biggest expenses)
Proforma- Proforma analysis, much like a hypothesis, is an educated guess of the property’s performance
RE- Real estate
Vacancy rate- The percentage of time the property will be unoccupied
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There are basically three types of RE investors: Those looking for capital gains (a subject for another time) Those looking for cash-flow Those looking for a combination of both.  For this article we’ll focus on investing for cash-flow.  The easiest way to determine a piece of property’s worth is through the use of a few simple formulas.  Of course, “worth or value” are rather subjective and can be determined by a myriad of variables, including the investor’s comfort level and experience, financial needs, capital required, availability of loans, etc, but once again, in this article we’re going to concentrate on cash-flow and nothing else. For this analysis we’ll use the following hypothetical 4-plex, being offered at $175,000, with rents of $500 per month per unit.

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Step One.  Determining the Gross Operating Income.

To determine GOI, add up all the income produced by the property.  The major component here is rent. 

Example: Using our prospective 4-plex, rents: $500 X 4 = $2,000/mo or $24,000/yr.
The property is not generating any other income, which is a possible opportunity for you.
[Incidentally, in the U.S., buyers of properties of 5-units and under are supposed to be protected by certain disclosure laws, meaning if the owner knows about any problems, he/she should (read: SHOULD, not WILL) tell you about them].

Step Two.  Determining the Expenses.

This step is a little more complicated, and a lot more subjective.  First, your agent/broker should be able to provide you with copies of all the expenses for the past year or so (i.e. gas, electric, water bills (if applicable), repairs, etc).  My experience is that most sellers don’t keep good records, or don’t want to show them to you.  Either way, you will likely wind up using proforma information (created by you, not the selling agent).  The good news is that you can obtain near-perfect data on the biggest expenses, PITI (principle, interest, taxes & insurance).  Contact your mortgage broker to get a quote that includes PITI.  Maintenance costs and vacancy rates can be obtained through one or more of the large firms that provide free information on the subject (and the RE market in general).  You can get an average from them, you can attempt to obtain the information from the seller, or you can guesstimate.  I tend to use a combination of all three methods.
Property management costs will vary (usually between 5% and 10%) and can be determined by contacting local agencies.
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Subtract the total expenses from the gross income.  GOI – Total expenses = NOI, or cash-flow.    $2,000 - $1,750 = $250/mo or $3,000/yr.

Remember that these are quick, down-and-dirty numbers.  The true numbers won’t be realized until you’ve owned the property for a year or so.

Step Four.  Determining the Cash on Cash Return.

Divide the annual NOI by the Down Payment (20% of $175,000 + closing costs).  $3,000/$37,000 = 8.1% CCR, excluding any capital gains.

And now you’ve got it, easy as ABC, you mastered the basics.  Given our hypothetical scenario then, is 8% or $250 per month an adequate return for you, given the level of risk and expected capital gain?  How many of these investments will it take to get you legal residence and a second passport?  Do you have the money for the down payment?  If not, perhaps you should be saving, or look for distressed properties or motivated sellers that will carry back the down payment.  This is just the tip of the iceberg...Now go invest!
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Some recommended books: How to buy and sell apartment Buildings, by Eugene Vollucci The Complete Guide to Buying & Selling Apartment Buildings, by Steve Berges

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