Knowing how much an investment property is worth is a very crucial aspect of real estate investing. By knowing the value of your investment and understanding your market, you will be able to make smart investment decisions. So, how can real estate investors determine the market value of a real estate investment? Through real estate market analysis! What is real estate market analysis? How can it be performed? What are the important factors to consider when undergoing a real estate market analysis? All these questions and more will be answered throughout my blog. Please feel free to leave any comments or share any personal experiences that you feel will be beneficial. I would love to hear what you have to say!
What is real estate market analysis?
A real estate market analysis or comparative market analysis (CMA) is a process used for analyzing a certain real estate market based on data in order to determine the best potential investment properties to purchase in the market. From its name (comparative market analysis), you should know that it depends mostly on comparing investment properties with one another. You can use real estate market analysis to compare your investment property to other competing properties in the market.
Many investors will confuse the concept of real estate market analysis with an appraisal when in fact, they are quite different from each other. A professional licensed appraiser does an appraisal, while CMA is done by a real estate agent or broker with market knowledge. In both cases, the appraiser and the real estate agent/broker are required to do a market evaluation, not a cost evaluation. The “value” is what a potential buyer is willing to pay and what a seller is willing to take. The “cost” is the amount of money that one has to put into the property.
Why is real estate market analysis so important?
Moving on to the second point: why is it crucial for real estate investors to do a real estate market analysis? A real estate market analysis is important for those who want a steady cash flow in real estate. Every real estate investor who enters the world of real estate has one goal in mind: to make money! Naturally, not all properties in a real estate market will be equally optimized for investing so it’s only logical to perform an analysis before making any decisions. CMA helps investors to determine if a particular piece of property will make a good investment or not. By performing a real estate market analysis, investors will be able to know how much rent to charge and will be able to set a listing price for the property. Real estate market analysis is important because it prevents real estate investors from falling into the commonly made mistakes of either pricing too high and not finding a buyer or pricing too low and missing out on a good return on investment.
How to conduct a real estate market analysis
A real estate market analysis might seem like a nerve-wracking step, especially if you’re a beginner real estate investor. You might find it difficult to get the necessary data for conducting a real estate market analysis, and you might not know how to go about the different steps required for analyzing the market or the investment properties in it. To do a real estate market analysis correctly, you will have to take into consideration certain factors. Below are the basic steps to conducting a CMA.
1. Choose the location
We can never stress enough about the importance of finding the right location for your investment property. You want to find a location that is a buyer’s market since these markets are more advantageous for purchasing investment properties. You want to look for an area with high demand. The demand refers to the number of people who want to live in an area. The more people who want to live in a certain location, the greater the competition is and this makes homes more expensive. To help you find the best locations and make your search much easier, use Mashvisor’s property finder.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
2. Analyze your investment property
Now that you’ve chosen a location and the property type, you can start analyzing. But before you can start comparative market analysis, you need to do what is known as property analysis. There are certain features to keep in mind that will affect the value of your property such as:
- Size or square footage
- Certain amenities like swimming pool or balcony
- Recent improvements
- The area and neighborhood
- Number of bedrooms or bathrooms
- Construction age
3. Find comparable properties
The next step is to find comparable properties to yours. It is recommended to look at previous listings within a 1-3 mile radius from your property. Find a number (preferably 3-5) of recently sold properties in the area that have common characteristics to yours. These “comparables” are commonly known as real estate comps and they are investment properties that share similar features with your property. To make this step easier on you, use a rental property calculator which will automatically return real estate comps when you view an investment property listing. And where can you find a rental property calculator? Mashvisor of course! Click here to learn about our calculator.
4. Compare the properties
The final step to performing a real estate market analysis is comparing the properties that you have collected as real estate comps. After picking the potential investment properties, you need to compare the properties based on their prices. Set the properties up in a range with a ceiling price and a floor price. From the properties you have selected, pick one that is definitely worth more than yours based on amenities and set it as your ceiling value. The property that is for sure less than yours will be your floor value. This is the price range your property market value should fall into.
Performing a real estate market analysis can seem very frightening especially if it’s done on your own. The good news is that it’s not an impossible task and with the help of Mashvisor you can analyze investment properties like a pro! Don’t fall into the trap of buying an investment property before analyzing it and always remember that your goal in real estate investing is to make money, NOT lose it!