To be a successful real estate investor, you need the ability and resources tothoroughly perform a complete real estate investment analysis. As a beginner, you may be asking what exactly real estate investment analysis is and why it is so important.
Real estate investment analysis is all the steps and calculations that you have to perform in order to find out the real value of a real estate investment property.
When looking at multiple real estate investment properties, you may start eliminating some based on if they are located too far from you or if you feel the asking price is way out of your budget. However, making the decision on which investment property to choose cannot stop there. Real estate investment analysis will allow you to make more informed investment decisions. Let’s take a look at some of the advantages of real estate investment analysis in detail.
Advantage #1 Overall Accurate Data
A seller of an investment property isn’t always going to be the person you can trust the most in the world. There’s a simple reason why: the property seller wants to do anything and everything to sell his/her investment property and get a maximum profit. This is where pro-forma data can come from. Pro-forma data is the estimated data about the value of a property that you usually find initially. You hope that is it accurate, but a lot of the time, it isn’t.
This is where real estate investment analysis comes in. When you’re performing analysis on a real estate property, you’re getting the most accurate data out there, away from the information provided by the property seller. While you can use different tools online, like Mashvisor, to find the right data, you can also ask to see actual records regarding the property: tax returns, maintenance and repair records, property tax bills, etc.
Advantage #2 The Real Value of the Property
Surprises are never a real estate investor’s friend, and real estate investment analysis will help you avoid running into any future surprises. Done well, it will give you the whole picture of the investment property.
For example, single-family homes really require a real estate investment analysis. This is because the value of this type of investment property doesn’t rely on the numbers and calculations alone. The real estate investment analysis will lead you to comparables (real estate comps): other investment properties located in the same area that have similar features and characteristics. The value of a single-family home will depend on these comparables. If these real estate comps are high in value, the investment property you’re considering will be high in value. If, for some reason, the real estate comps are losing value, so will your investment property. So, you need to have all this information in hand. You don’t want to end up investing in real estate that is losing value.
Related: How to Easily Find Real Estate Comps
Likewise, real estate investment analysis will give you the whole picture of a multi-family investment property. While the value of these types of investment properties doesn’t rely on real estate comps, it heavily relies on the rental income they will produce. Real estate investment analysis will give you all the information to end up with the most accurate rental income a property will produce.
Advantage #3 Vacancy Rate Included
An issue some real estate investors run into down the line is dealing with expenses that pop up during a vacancy. Without real estate investment analysis, you may be looking at the rental income that the rental property generates at a 100% occupancy rate. If a rental property is fully occupied when you are buying it, you may not even consider vacancy rates. However, every area has an average vacancy rate. A real estate investment analysis of a property will let you take into account that your rental property is susceptible to this vacancy rate and calculate how much rental income you won’t be receiving from this.
Advantage #4 Buyer Personalized Information
A property seller will show you numbers like net operating income (NOI) and capitalization rate. These numbers may look good to you and encourage you to jump into this real estate investment. However, you’ll be making a rookie mistake. These numbers are completely independent of the property buyer’s financing. Your interest rates and mortgage payments are not taken into account here.
With real estate investment analysis, you’ll dive deeper into numbers that reflect your personal financing situation: cash flow and cash on cash return. The analysis will give you all the numbers, dependent and independent of the investment property, to help you make the best investment decision for your personal needs.
Related: Cap Rate vs. Cash on Cash Return
Advantage #5 The Future of Your Investment Property
No real estate investor can predict the future of an investment property: whether or not it will continue to bring success to the investor. Despite this fact, real estate investment analysis can be used to give a good estimate of what the future will bring for your investment property. The analysis can be extended to account for the next couple of years with the use of trend data and demographic data. This data will show the direction of the local housing market, inflation, or even tax trends if you wish to be really thorough. Ultimately, a property may seem like a safe investment this year, but maybe next year it will cause you losses that real estate investment analysis can help predict ahead of time.
Advantage #6 Return on Investment
An initial look at an investment property may show that you have to put down a sizeable sum of money to actually invest. You might be tempted to run in the other direction towards a lower investment. This could end up being a huge mistake and cause you to miss out on a profitable investment property.
Real estate investment analysis will give you the return on investment (ROI): the amount of cash flow of a property relative to how much money you invested. A good ROI occurs when the cash flow is higher or the amount invested is lower. You’ll automatically think the only way to get a good ROI is to find a cheaper investment that you can make a lot of money from. While this, of course, is a great option, there are higher investment properties that yield a greater ROI than a lower investment property that may not even have positive cash flow. Real estate investment analysis will help you choose which property you’ll benefit more from, so you don’t have to depend on initial assumptions.
Advantage #7 A Confident Investment Decision
It’s obvious now that with real estate investment analysis, you’ll have all the right information to back you up when you’re making a decision on what property to invest in. There is nothing more valuable than the thought that you are 100% confident in every decision you make in real estate investing. One informed investment decision after another and soon you’ll have a string of successful real estate investments to be proud of. It all starts with real estate investment analysis.
Overwhelmed by all the calculations and data that come with real estate investment analysis but still want to benefit from the advantages of it? Hop on over to Mashvisor where you’ll find vast listings of properties with all the values of real estate investment analysis at your fingertips. You, too, can start benefiting from real estate investment analysis now.