Before you can invest in real estate, you must first examine your purchases in the same way you would evaluate any
other prospective investment you want to add to your portfolio. An investment property analysis is a method of making sense of that evaluation and weighing the choice of whether a particular property is worth exploring.
Rental property investment analysis can be complex, especially for a newbie, because there are so many elements to consider. Even so, you don’t have to be an expert in real estate or a mathematician to examine an investment property. Anyone can do it with a structured approach and the correct tools.
Now, how do you determine whether a specific traditional rental property for sale would provide significant returns? Here’s a straightforward step-by-step guide to investment property analysis.
How to Get Started on Investment Property Analysis
Rental real estate can be an excellent method to create income and accumulate wealth, but very few early investors understand how to evaluate and select properties. Buying your first rental property is an extensive financial choice that shouldn’t be treated lightly, so make sure you know what you’re doing.
We have a guide on cash flow, capital growth, plus a few other considerations for potential investors. Analyzing real estate data can lead to years of high income and a large amount of built wealth and average returns. However, when most people consider conducting a real estate investment property analysis, they expect the process to primarily examine metrics.
Although metrics are a necessary step, they are not the only ones you should consider. Before you start crunching math, get basic information about the property and the surrounding neighborhood. Here’s how to find the information you’re looking for.
#1 Investigate the Rental Market
Before you acquire an investment property, you must first understand the market in which it is situated. This is due to the fact that location is an important factor in influencing the performance of an investment property. Property pricing, rental costs and expenditures, the tenants you get, and the value of your property are all affected by location. As a result, if you want a decent return on investment, you should start your property study by analyzing the location to guarantee it is a good real estate market.
Here are some characteristics of top rental markets to look out for:
- Population growth
- Economic growth
- Growing job market
- Good price-to-rent ratio
- Low insurance costs
- Low property taxes
You can also do real estate market analysis by consulting Mashvisor’s blog for city statistics and insights. This contains the median home price, average rental income, cap rate, cash on cash return, Airbnb occupancy rate, and other factors. What if you discover that the traditional rental property is in a poor housing market? Then proceed. Take your time researching various housing markets. You should not limit yourself to the markets closest to you.
#2 Perform a Neighborhood Analysis
If you’ve determined that the investment property for sale is in a profitable market, the next stage in your property analysis is to reduce your hunt to a micro-level. In other terms, you should be certain that the neighborhood provides the best rental investment options in your preferred city. And anyway, the rental income potential of an investment property tends to differ in each metropolitan neighborhood. You must conduct a neighborhood analysis to ensure that you are investing in one of the city’s best-performing communities.
Here are some characteristics of a good neighborhood for real estate investment:
- Low crime rate
- High employment rates
- Low percent of owner-occupied homes
- Good school district
- Favorable local laws
When conducting investment property analysis, you should also look into the typical return on investment in the area. Using Mashvisor’s Real Estate Heatmap is the simplest approach to conducting this neighborhood study aspect. It’s an extremely simple tool to use:
Simply enter your desired city, select a filter, and the map will emphasize the performance of the city’s neighborhoods in various hues. You can use several criteria to find high-ranking neighborhoods based on factors such as listing price, rental revenue, cash on cash return, and Airbnb occupancy rate. You may check how the area of your choosing performs and compare it to other neighborhoods in the city in this manner.
Using Mashvisor, you may not only compare an area to others in the city, but you can also get a detailed study of the neighborhood. Visit the Analysis Page for your neighborhood to find more about comps and other information. Take a look at this Neighborhood Analysis.
#3 Residential Investment Property Analysis: Important Real Estate Metrics
The next stage in investment property analysis is to analyze the rental property after evaluating the location at the neighborhood scale. This is a critical component of your rental property study. It entails gathering property data and performing calculations to determine whether purchasing an investment property makes financial sense. Here are the important figures you must compute in your income property analysis.
When you are performing investment property analysis, competent real estate investors consider cash flow upfront. The amount of money left over after deducting rental expenditures from rental income is referred to as cash flow. Consider purchasing a rental property with a positive cash flow if you want to make money in real estate. Cash flow analysis ensures that you only engage in properties that will generate a profit every month and that you will not have to use money from your wallet to cover some costs.
Cash on Cash Return
If you plan to finance the home with a mortgage loan, cash on cash return is an important indicator to consider. It is the annual pre-tax cash flow (NOI – annual mortgage payment) to the overall cash investment ratio (down payment, closing costs, any rehab expenses, and other loan charges). These indicators are crucial in real estate property research since they reveal information about the rental property’s performance. As a result, rather than depending on just one of them to make an investment decision, an investor must compute all of them through property analysis.
The cap rate is the possible rate of return on an investment property if it is bought in cash. It is computed by dividing the property’s net operating income (NOI) by the acquisition price or market value. Because the manner of financing is not considered, it is typically used to compare many similar investment homes for sale in a specific location. Although what constitutes a reasonable cap rate varies depending on criteria such as area and property type, many real estate investors strive for a high cap rate asset, typically between 7-12%.
Net Operating Income (NOI)
When it comes to investment property analysis, one of the first steps should be determining the property’s net operating income. NOI is a measure of the income generated by a property after operational expenses are deducted. While NOI may not provide a complete picture of a property’s profitability, it does serve as the foundation for many other calculations you’ll employ in your study. The net operating income formula:
Rental income + other income – operating expense
Though tenant rent will most likely be the majority of your income, make sure to account for any extra sources of income, such as parking fees or money from laundry machines. Repairs, utilities, and all of the other usuals, on the other hand, should be factored into the operating expenses side of this equation. Your mortgage payment, on the other hand, should not. Net operational income does not include debt service.
Using Mashvisor Investment Property Analysis Calculator
While you can still run the above data using an investment property analysis spreadsheet on your own, it can be time-consuming and tiresome. Spreadsheets are also prone to mistakes. Mashvisor’s property analysis calculator is the most precise and effective approach to finding property data and calculating critical indicators. Mashvisor’s investment property analysis software uses predictive analytics and machine-learning techniques to offer consumers easily derived property data. It enables you to do a property analysis from the convenience of your computer or smartphone in a couple of minutes.
It accomplishes this by allowing you to locate and evaluate both neighborhoods and investment properties. All you need to do is enter some general details based on your investment requirements, and the calculator will do the rest. Because it employs both traditional and prediction analytics, the tool is both rapid and accurate.
Both Airbnb and traditional rental tactics are included in the set of performance measures. As a result, it is much simpler to determine the most effective rental strategy for the property under consideration. If you consider investing in Airbnb investment property, Mashvisor’s calculator is the most incredible tool for calculating your return on investment.
If you want to give Mashvisor a try, start by clicking here.
#4 Conduct a Comparative Market Analysis
After crunching the calculations, you will be able to determine whether the investment property has a high-profit chance or not. Nevertheless, you should not make an offer quite yet. The final phase in the investment property analysis is to determine the property’s fair market value using comparative market analysis. That entails contrasting the home with other comparable rental properties that have recently sold in the neighborhood—real estate comps.
What is a Comparative Market Analysis?
A comparative market analysis assists sellers in determining the optimal listing price for their properties. The “optimal” price is one that is not so small that money is lost, but also not so high that the house does not sell at all. For purchasers, a CMA can confirm if a home is a good bargain and assist in determining a competitive offer that will be treated seriously—without going over the top.
The first and most crucial step in preparing a real estate CMA is to learn as much as possible about the income property you intend to acquire or sell. To do a complete comparative market analysis, compare apples to apples. Although that is an overused statement, it is nonetheless significant. It indicates that if you want an accurate estimate of the worth of a property, you should look for properties that are as comparable to it as feasible. And to uncover such traits, you must first learn everything you can about your own. As you might think, the more information you have about your investment property, the simpler it is to identify real estate comps and, as a result, the more precise your CMA will be.
Benefits of Conducting a Comparative Market Analysis
Performing a CMA will assist you with the following activities if carried out correctly:
- It’s essential to know how to make the best offer possible so you can avoid overpaying for a house. When a listing price is lower than the market value, it is even more favorable.
- When purchasing a home, it is vital to make an educated guess about the appropriate rental rate.
- It will help you understand how the housing market is performing overall.
When doing investment property analysis, though your local realtor can assist you in locating sales and rental comps, you can do it quickly and easily by using Mashvisor. With the touch of a button, Mashvisor provides you with a list of comparable properties for each listing on the marketplace. If the calculation appears to be correct, you can proceed with making an offer.
Investment property analysis is one of the most important skills to learn before purchasing an investment property. You’ll be able to tell whether purchasing an investment property makes economic sense if you conduct a thorough investigation of it. If you plan to buy an investment property quite soon, make sure first to read our property analysis guide that we just concluded.
You should keep in mind that our real estate analysis software allows you to locate the best locations and most profitable investment properties in the United States housing market in a couple of minutes. With Mashvisor, you’ll be able to make confident investment choices and avoid making costly mistakes.
Subscribe to Mashvisor today to receive access to our real estate investment tools for free for seven days, after which you will receive a lifetime discount of 15% off your subscription.