Real estate investing can certainly be a very profitable career choice if handled with care. The most successful real estate investors will tell you with no doubt that gaining real estate knowledge is the right path towards making money in real estate. When it comes to the finding and investing in various income properties, it is important to know how to execute the process so that the end result would be making money in real estate. Typically, in real estate investing, in order to find the best rental properties, you need to learn what analyses to conduct and what metrics and variables to take into consideration. That can also be considered to be a very big and basic part of your real estate knowledge.
Of course, it is not easy to learn about all the different analyses in real estate investing. That is why in this blog we will discuss the two analyses you definitely should know about- real estate market analysis and investment property analysis. Moreover, we will go over some investment and market analysis tools which can ease the process of finding the best income properties. Are you ready? Let’s start!
#1 Real Estate Market Analysis
This is one of the key analyses you need to know about if you are interested in real estate investing. Real estate market analysis, popularly known as comparative market analysis, consists of studying the housing market of your interest.
The most successful real estate investors know that the location and the condition of the local housing market can have a significant influence on the success of your investment properties. Through conducting comparative market analysis, you can easily explore the performance of rental properties in the area and see if a potential investment is worth it. Additionally, you can get more information about the condition of the real estate market and act accordingly. For instance, a buyer’s market favors the buyers. This is due to the fact that there is less demand than supply, thus, the prices of investment properties go down. That is a great opportunity to start real estate investing. In the condition of a seller’s market, the prices of income properties go up due to the lack of supply. Consequently, it might be a great chance to sell an investment property.
Comparative market analysis has other functions besides revealing information about the real estate market. Through comparing an income property with real estate comps, you will learn what its market value at the specific moment is. The latter is extremely useful for many real estate investing situations. First of all, when searching for rental properties, knowing the value of the chosen income property will stop you from overpaying for it. This will certainly influence the rental expenses associated with the investment property and will, respectively, lower the rental income you receive. Moreover, when selling an investment property, knowing its market value is useful in establishing the asking price for the property. Last but not least, when dealing with a rental property, knowing its market value can help you in deciding how much to charge for rent. The most successful real estate investors consider that the rent should fall between 0.8% and 1.1% of the market value of a rental property. To dig deeper into this matter, make sure to read “How to Conduct Real Estate Market Analysis without a Real Estate Agent.”
#2 Investment Property Analysis
Investment property analysis deals with examining the investment properties themselves. It comes as no surprise that in order to be making money in real estate, you should purchase a positively geared rental property. This means that the rental income the property generates will be higher than the rental expenses associated with the property. Of course, there are some indicators of whether or not an income property will be successful. The most important real estate metrics you need to know about when conducting investment property analysis are return on investment, cash on cash return and capitalization rate.
Return on Investment
Return on investment expresses the total growth of the investment property as a percentage. This is one of the most important metrics in real estate investing. This is because the metric is very useful when comparing different properties. However, it is also beneficial when trying to predict the success of the chosen real estate investment. The formula for calculating the metric is as follows:
ROI= (Gain from the Investment- Total Rental Expenses)/ Cost of Investment
Cash on Cash Return
Cash on cash return is another metric used in real estate investing to indicate if investing in a property is a potentially profitable idea. A good CoC return is between 8% and 12%. However, many house investors aim higher. CoC return computes the cash income generated by the investment property on the cash which was invested in the property.
CoC Return= Net Operating Income/ Total Cash Investment
Capitalization rate, or cap rate for short, is another metric you need to add to your real estate knowledge. Cap rate is used as an estimation of the potential return of a property. This estimation is on the basis of the total rental income the property generated on all cash investments. The higher the score of this metric, the greater the return on investment, but also the higher the risk.
Cap Rate= Net Operating Income/ Current Market Value
To study this topic further, make sure to read “How To Do Investment Property Analysis.”
#3 Real Estate Investing Tools
When you want to start or develop your career in real estate investing, you need to analyze various markets and numerous properties in order to find the best investments. Conducting analysis on your own can be extremely challenging for several reasons. First of all, the data collection process is quite hard and requires a lot of time. Moreover, it is tiring to enter data manually, let alone analyzing it later. Further, when conducting so many computations manually, there is always a chance of making a mistake. Consequently, you might end up with inaccurate results.
Luckily, there are different property and market analysis tools to help you in this task. One market analysis tool is the heatmap analysis. There are also many calculators specialized in providing you with the results of a specific real estate metric. Among all the real estate investing tools, however, there is one that is a must to use. This is necessary in order to conduct proper analysis and be successful in real estate investing. This is the investment property calculator.
Mashvisor’s investment property calculator is one of the greatest real estate investing tools, which has many useful features. The tool computes all the necessary real estate metrics for the evaluation of a property. Additionally, it provides you with detailed information about the property as well as its neighborhood. Moreover, Mashvisor’s investment property calculator suggests the optimal rental strategy for the specific investment. In addition, the tool gives you the option of entering the financing method of your rental property. Then, it provides you with customized results. To read more about this tool, please visit “Investment Property Calculator For Analyzing Real Estate Investments.”
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.