Everyone wants to get a good deal.
In real estate investing the market could get quite competitive. The real estate market is currently a seller’s market, which doesn’t make it easier for the buyer to get the deal they’d like. Negotiations will take place, but the seller will usually have the upper-hand. So how can you make sure you’re getting your money’s worth when buying an investment property? Three words: comparative market analysis.
Related: It’s a Seller’s Market But You Can Still Invest in Real Estate
What is a Comparative Market Analysis?
We’ve talked about the importance of a comparative market analysis in our previous blogs, and for good reason. This is one of the must-have real estate investment tools for every real estate investor. It is an examination of the prices similar properties recently sold at. A real estate agent usually conducts the comparative market analysis and advises both potential sellers and buyers in the market on proper price points. The comparative market analysis, also known as a real estate market analysis, is done by a real estate agent. The real estate agent helps the client know what price to offer when buying a property and what price to list when selling a property. The goal of the comparative market analysis is to find an appropriate price point for an investment property based on the property price of recently sold similar properties or “real estate comps.”
Related: How to Find Real Estate Comps Most Effectively
Making money in real estate is all about choosing the right price for the given value of a property. An investment property’s value is determined based on the real estate market’s value of comparables in the same area. By comparing similar properties you can ensure that you’re not losing money by buying a property at too high of a price. We know that it’s unlikely to find two investment properties that are exactly the same, so how do we choose our real estate comps?
Choosing the Right Comparable Property
Whether you’re interested in a regular property or an income property, you want to choose the right property to compare. After all, you don’t want to end up comparing a particular property to one that has a completely different value. Here’s what to look for when choosing real estate comps/rental comps:
When The Property Was Sold
Obviously the more recent the sale, the better. The real estate market is fast-paced and you don’t want to be comparing properties that have been sold over 3 months ago. In some neighborhoods, there might not be as many sales per month of similar properties so you are bound to consider older sales. In this case, real estate agents often include currently listed properties in the analysis as well. You can also search for comparables of recent sales in similar neighborhoods. You can visit Mashvisor and start your search for investment properties. We provide you information on investment properties from any neighborhood in any city. Compare selling prices, locations, and different metrics such as cap rate from our neighborhood analysis. All this and more when you visit Mashvisor. Remember the more recent the sale, the more relevant the price.
Property Location
As we’ve mentioned above, the location of the comps is key. It’s important to find properties in the same or similar areas. You might be looking at two very identical properties: same square footage, same number of bedrooms and bathrooms, and similar features, but they differ in price. Why? Maybe because one is on a busy street and the other is on a beachfront. So you’re not only looking for the same general area, rather you’re looking for the different features of location relating to that property. Is it close to a school? On an intersection? Have a nice view? All these factors affect the market value of an investment property and are even more the reason why an investment property analysis should be conducted.
Related: How to Choose the Right Location for Rental Properties
Property Type
Are you considering buying an income-producing, or non-income producing property? Non-income producing properties are investment properties that are houses, vacation properties, or vacant commercial buildings. They’re basically any real estate properties that don’t have a direct in-flow of money from rent, so any returns are dependent on capital appreciation. Income properties are real estate properties that provide a cash flow back to you, usually through the form of rent. The most widely known properties are office, retail, industrial, hotels, and leased residential.
In this case, it is important to utilize a rental property analysis. This allows investors to analyze a potential real estate investment to determine its viability for renting out and its potential returns. You can compare rental comps based on their expected return on investment, cap rate, cash on cash return, rental expenses, rental income, and more depending on the type of rental property. You can use a rental property calculator to find these factors. It’s crucial that, when conducting a comparative market analysis, you only take into consideration properties of the same type.
Bottom Line: Make Sure You’re Not Losing Money
The essence of a comparative market analysis is that it exists to make sure that you’re not losing any money. It provides you with the means of analyzing the market. All the information you’re looking at can be confusing without any order or meaning of relevance. A comparative market analysis organizes your requested features and tries to match the investment property you’re interested in buying, to similar properties either recently sold or currently listed in the market. Real estate agents make adjustments so that market values can make more sense relating to the different features of different real estate properties. This information can help a buyer make the right call and get a great deal for a certain investment property.
Don’t forget, locating and choosing the right comps is crucial for a proper comparative market analysis. Mashvisor provides you with neighborhood analytics which can help you in conducting a CMA. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.