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How to Analyze an Investment Property to Determine Its Investment Viability


How do real estate investors analyze an investment property in a way which allows them to make their investment decisions with confidence and manage to make profits off of their investments?

There are a number of different ways that can be used to analyze an investment property, and most of the methods that real estate investors use can take a lot of time and effort, and can sometimes be inaccurate depending on the source of data that they have to rely on.

There are, however, some tools that are available to real estate investors to make the process easier and more reliable, allowing beginner real estate investors to compete with the most experienced investors in the market using real estate comps and analytics to their advantage.

How to Analyze an Investment Property?

There are a number of methods and metrics that are typically used to assess and analyze an investment property.

For real estate investing purposes, it is generally crucial for a real estate investor to be able to project and determine an investment property’s expected returns and performance in order to decide whether the investment property is suitable for his/her real estate investment goals and strategies or not. In order to analyze an investment property, a real estate investor would usually have to rely on obtaining as much data, real estate comps, and analytics as possible, from a number of different sources, such as real estate agencies and brokerage firms, MLS sources, or other online sources and governmental departments. After obtaining the analytics, the real estate investor would then have to compare the different results and calculate the different returns for each property in order to determine which investment properties are good and which investment properties do not meet the investor’s expectations or investment criteria.

Related: 6 Must-Have Real Estate Investment Tools

What Data Is Needed to Analyze an Investment Property?

First, in order to narrow down the property search results from the start, a real estate investor will need to filter out any investment properties that fall below or above his/her target or available budget. For this, real estate investors would need to obtain data related to the prices of investment properties in the area that they’re looking at. The median price metric is typically what they want to be looking for, and it will give them an idea of the area’s average price-points, indicating which properties are priced above or below market value, which helps real estate investors understand whether the property is in a good or a bad condition, especially when compared against the investment property’s age.

Related: The Use of Predictive Analytics in Real Estate Investing

Using Mashvisor to locate investment properties based on their median price can be a very efficient way to obtain quick and accurate results within a few minutes. The platform will allow you to set your budget range, filtering out any properties that do not meet your search criteria. You can additionally filter out properties that are of a certain age.

After setting your price range, you can customize your property search even further depending on your investment strategy and preferences by focusing on a certain real estate property types. To match your investment strategy, you might prefer particular property types that suit your investment more than others.

If you’re looking to invest in a rental property, for example, then you might want to look for condos or townhomes to purchase and rent out. In that case, searching in a metropolitan city might not be your best choice. Additionally, if you’re interested in rental property investments, you will also want to decide whether you’re more interested in short-term (Airbnb) rental properties or long-term (traditional) rental properties, and you will choose an investment property accordingly.

Using Mashvisor, this can also be done very easily through the other filter options available on the platform.

You can set the type of investment property that you’re interested in, the size of the property, and the number of bedrooms/bathrooms that it has, allowing you to only see properties that match your investment and rental strategy.

After deciding on these details, a real estate investor will want to determine the returns that are to be expected from their choice of investment property. This is the trickiest part of finding a property, and it will require the real estate investor to have sufficient knowledge and data in order to analyze an investment property that he/she is interested in.

Related: How Data Makes Real Estate Investors Rich: A Mini Guide

The Metrics That Are Used to Analyze an Investment Property

There are a number of different metrics that are mainly used to analyze an investment property, with some being exclusively used for analyzing rental properties in particular.

The main metrics that real estate investors use to determine the profitability or return on investment for a property are:

  • Cap Rate

Cap rate is used to determine the return on investment in case an investment property was purchased using cash. Real estate investors typically rely on cap rate when they analyze an investment property as the main metric of valuation, even if they were going to finance the property through a mortgage, as it gives them an idea of how viable the property is as an investment as well as the level of risk associated with it.

  • Cash on Cash Return

Whereas cap rate is used to calculate the projected returns of an investment property for a cash purchase, cash on cash return takes the financing into consideration, and unlike cap rate, it calculates the return on investment based on the amount of money borrowed through a mortgage loan. Cash on cash return will give you a more accurate result based on your specific investment, and you will typically want to use it after determining the number of properties that would perform well based on their cap rate value.

The metrics that real estate investors use to determine the viability of a rental property in particular are:

  • Cash Flow/Rental Income

The cash flow of a rental property is, basically, its NOI (Net Operating Income), and it measures the amount of money that you will be making off of a rental property on a monthly or annual basis. Cash flow takes into consideration all expenses in order to determine and analyze an investment property, including taxes, mortgage payments, and occupancy rate.

  • Occupancy Rate

Occupancy rate (opposite to vacancy rate) is a value that measures that amount of time a rental property is expected to be occupied by tenants throughout a set duration, typically a year, which can help real estate investors more accurately determine how much rental income they will be making from their rental property investment.

In addition to using Mashvisor for finding investment properties in your target area, the platform can also be used to analyze an investment property or compare a number of different properties based on any or all of the values mentioned above.

The investment property calculator will help you analyze and calculate the different values to determine the projected returns of an investment property using these metrics (cap rate, cash on cash return, cash flow, and occupancy rate). You you can customize your search results to only show you properties with certain returns based on cap rate, cash on cash return, or cash flow, saving real estate investors a lot of time and effort in analyzing and calculating the different values for different investment properties. For short term rental properties, you can use an Airbnb calculator.

Related: How to Perform a Real Estate Market Analysis

Determining Expenses to Analyze an Investment Property

One of the major issues that most real estate investors face when trying to analyze an investment property (or a rental property) is related to obtaining data and information to determine the expenses that are to be expected on their investment. There are several expenses that need to be taken into consideration, especially when trying to calculate the returns and cash flow of a rental property, and these can include:

Startup Costs (expenses that only apply upon purchasing the rental property):

  • Inspection costs
  • Repair costs
  • Furniture and appliances
  • Closing costs

Recurring costs (costs that will reoccur on a monthly or annual basis):

  • Insurance
  • Utilities
  • Property management
  • Maintenance
  • Taxes
  • HOA fees
  • Rental income tax

And the list goes on depending on the property that you’re investing in, its type, its size, and its location.

These expenses are typically difficult to calculate due to the number of different sources that a real estate investor would need to rely on in order to obtain the values for them. With Mashvisor, however, the expenses are readily calculated, and a real estate investor will also be able to customize and modify them, adding new expenses or removing ones that don’t apply to his/her investment property.

Related: How Agents and Investors Can Use Predictive Analytics

Bottom Line

In order to analyze an investment property, real estate investors would typically need to rely on a large number of different sources to gather the data and values needed for their analysis. While it would usually take a lot of time and effort in order to obtain the data, Mashvisor was created to address this problem and make it much easier for real estate investors to find, analyze, and compare investment properties in order to make the best investment decisions.

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Nasser Mansur

Nasser is an experienced content writer with a degree in English Language and Literature. He loves writing about all aspects of the real estate investing business with focus on market and property analysis and the best sources which every real estate investor needs in order to succeed.

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