We sure hope so. Real estate is a lucrative business opportunity for most, and while it is easier said than done, if you dedicate enough time and effort, you too can achieve financial success and generate strong returns for the long haul. In this post, we guide you and show you the best ways to conduct real estate investment analysis to assess the real value of any real estate property before you seal the deal.
What You Need to Know About Real Estate Investment Analysis
1. Look at comps to find your single family home investment
In the world of real estate, comps, aka comparables, are considered one of the best indicators in determining the market value of a home. In simpler words, the value of a single family home is generally determined by comparables in similar properties recently sold in the same neighborhood with the same characteristics, i.e., age of the house, same amenities, same number of bedrooms, etc. So, a single family home’s value goes up if similar homes in the area sell for higher, and vise versa. Real estate agents use comps to prepare a comparative market analysis for their clients.
But to make it easier for you, Mashvisor displays comparable rental income for all single family homes in any area of choice across the US. This way, you can rest assured that the value of the house you want to buy is fairly priced based on similar properties in the same neighborhood. For single family homes, rental comps are the way to go and are a prerequisite for real estate investment analysis.
2. The value of multi family homes is based on their income potential, NOT COMPS
Unlike single family homes, the value of multi family investment properties is derived from the property’s income potential, and not from comparables. So, it’s possible that an apartment building in a specific neighborhood increases in value, while houses nearby are dropping in value. So, if you are looking to invest in multi family rental properties, make sure you conduct a thorough real estate investment analysis to derive the full income potential of the real estate property you want to purchase. One key takeaway: DO NOT compare your apartment building to the other apartments down the street to see how much your property is worth.
3. Start off by gathering your own research
You must do your own due diligence in order to succeed in real estate investing. Consulting a real estate professional (i.e., real estate agent or broker) is also recommended, but do not rely solely on someone else to make the decisions with your money. To conduct proper real estate investment analysis, look for the following:
- Property: Number of units, square footage, utility metering design, etc.
- Purchase info: Purchase price, price of repair you will incur, etc.
- Financing: Total loan amount, down payment amount, interest rate, closing costs, etc.
- Income: Rental income
- Expenses: Costs of maintenance, property taxes, insurance, etc.
4. Pro-Forma Data vs. Actual Data
In follow up to our previous point on multi family homes, it is crucial that you conduct proper financial analysis to determine the true worth of the building down the line. You will receive pro-forma data, aka estimated, more appealing data on the value of the property from the seller’s vantage point. Now, remember the seller wants you to buy the property and most likely will give high estimates of rental income and/or ‘forget’ to mention maintenance expenses that you will incur down the line.
To ensure there will be no surprises, it is imperative you ask the seller for actual data on income and expenses, i.e., previous years of tax returns, property tax bills, maintenance records, etc. If the pro-forma data and actual data are aligned, then you will be in a better position to make an informed decision of whether or not you want to buy the property.
5. Turn to Mashvisor for property and market data in an instant
Forget about manual calculations and long, wasted hours trying to estimate the value of an investment property. Mashvisor turns 3 months of research into 15 minutes and guarantees profitable rental properties anywhere in the country.
- Ability to compare returns on investment properties in a selection of neighborhoods anytime, anywhere
- Average traditional and Airbnb cash on cash return and cap rate for each area
- Heat map to identify areas that meet your criteria
- Traditional and Airbnb rental comps
- Property and neighborhood calculations including rental income, cash on cash return, cap rate, property price, Airbnb occupancy rate, and optimal strategy (traditional or Airbnb)
Long story short, Mashvisor gives you access to property and market data in an instant to help you conduct proper real estate investment analysis.
6. Key terms and calculations for real estate investment analysis
- Net Operating Income (NOI) = Income – Expenses
- Expenses including but not limited to: property tax, insurance, maintenance, etc.
- Cash Flow = NOI – Debt Service
- Return on Investment (ROI) = Cash Flow/Cost
- Cap Rate = (NOI/Current Market Value) x 100
- Cash on Cash Return = NOI/Total Cash Investment
If you want to delve into these terms in further detail, we highly recommend to check out Mashvisor blogs and find everything that you need to know about real estate investing. Because let’s face it, smart decision making starts with acquiring the right knowledge and resources. There is no such thing as luck in real estate investments; you make big bucks when you start making more informed decisions.
We cannot stress enough the importance of real estate investment analysis before you close in on any real estate transaction. If you want to to guarantee high returns and gain financial freedom in the long term, you are responsible to do your own due diligence in gathering the necessary data when it comes to assessing real estate properties and their income potential.