So, you want to know how to begin a real estate business. You’re definitely making an excellent choice for building wealth. Like any business venture, however, there are plenty of things you need to learn to succeed. Some of these include how to become a real estate investor and how to buy investment property. One of the most important things to know, however, is the topic of this blog: a comparative market analysis.
What is a Comparative Market Analysis?
The name of the term is completely self-explanatory. A comparative market analysis (CMA), also known as a real estate market analysis, is an analysis of a rental market through comparison of properties. The goal of a real estate market analysis is to estimate the value, or price, of an investment property through the use of real estate comps and adjustments.
Is There a Difference Between a CMA and an Appraisal?
Both a real estate market analysis and a house appraisal deal with property value, but are they the same? The answer is no. An appraisal is an estimation of value by a licensed appraiser. The value obtained through an appraisal has legal and financial implications. A CMA, on the other hand, is an estimation of the range of property value relative to other properties in a certain market. You also don’t need a licensed professional to conduct a CMA. Any real estate investor with the required data can conduct the analysis. Still, a CMA is a must for real estate investors for reasons we will now explain.
Why is a Comparative Market Analysis Important?
Every real estate investor, especially a beginner real estate investor, needs to have a good understanding of the value of his/her properties. This is one of the reasons why a CMA is very important. Value is dependent on many aspects of real estate, such as equity and rental income, which makes it vital for real estate investors to know. An estimation of value can also help determine how much rental income to charge. The general rule is that properties over $350,000 in value should charge 0.8% of their value. Properties below that standard should charge 1 to 1.1% in rental income.
How to Conduct a Comparative Market Analysis
So, how exactly does a real estate investor conduct a CMA? Here are the general guidelines of the analysis, simple enough for a beginner real estate investor to understand yet still informative for experienced real estate investors.
Investment Property Analysis
An investment property analysis is the very first step in conducting a comparative market analysis. This topic can be very detailed, which warrants a blog of its own. Luckily, we’ve done just that. Be sure to check this blog out for more information: “How to Do Investment Property Analysis”!
Still, here is an overview of an investment property analysis. The analysis sets a baseline of a property’s value based on the property’s features. Features include location, area, square footage, number of bedrooms and bathrooms, proximity to other areas, etc. Once the investment property analysis has been completed, a real estate investor should have a good understanding of the property of interest.
Real Estate Comps
The next step in a comparative market analysis is to identify real estate comps, short for real estate comparables. Finding real estate comparables requires a neighborhood analysis to find properties that are similar to yours. That begs the question, how can you find real estate comparables and conduct a neighborhood analysis? The answer: Mashvisor’s rental property calculator. Mashvisor’s investment property calculator quickly locates real estate comps at the click of the mouse. To find out more, read this blog post: “How to Easily Find Real Estate Comps”!
The criteria of a neighborhood analysis to find real estate comparables are vast. However, some key features to look for in your comps are location, construction age, square footage, amenities, upgrades, and condition. You can read about more features to consider in the analysis in the aforementioned blog, but these features should help you get started.
Current, Pending, and Sold Listings
Real estate comps come in three main forms: current listings, pending listings, and sold listings. The most useful ones are current listings, which are properties already on the market. As mentioned previously, you can find these comps through Mashvisor’s investment property calculator. Current listings provide a plethora of information regarding the value of properties. The next type of properties to look for are pending properties, which are properties that are currently being bought. These properties, along with sold listings from 6 months ago, are also important in the analysis. You will be able to set a range of property prices based on these three types of listings.
Identify Ceiling and Floor Prices
The final step in a comparative market analysis is to organize properties based on their features. Then, adjust the data to reveal how different features impact the property prices. Once you are able to adjust the data and set ceiling and floor property prices, you have completed the analysis.
Where Can You Obtain Data for a Comparative Market Analysis?
A comparative market analysis is a must-know when becoming a real estate investor. Real estate comps are necessary for the analysis, but the problem is they are constantly changing in the dynamic rental market. Therefore, it only makes sense to use a source that is constantly updating its listings, right? Exactly! This is why you should use Mashvisor’s investment property calculator as your primary source of data when performing a CMA.
The rental property calculator isn’t limited to finding comps, however. It can also calculate and project the profitability of properties. If you’re looking to find out the rental income, cash on cash return, cap rate, rental rate, and return on investment of a property, you’ll need to use the calculator. To learn more about the rental property calculator, read this: “Where Can You Find a Rental Property Calculator?” To use the calculator to start a comparative market analysis or anything else, click here to start your free 14-day trial with Mashvisor!