A skilled investor knows the importance of market analysis and knows how to utilize the available real estate investing tools at his/her disposal in order to come up with an investment strategy that has a high chance of success as well as a high profitability.
What Is Residential Property Market Analysis?
Residential property market analysis is the process of analyzing a specific real estate market to determine the best potential investment properties in an area or a neighborhood based on quantitative and qualitative data relying on property comparisons. Conducting residential property market analysis is key to achieving success in the real estate investing business. The accuracy and quality of residential property market analysis depends heavily on the real estate investor and his/her skills in researching the market, identifying useful information and data sources, and utilizing that data in order to acquire results that are applicable to the investment process.
What Are the Main Metrics Used for Residential Property Market Analysis?
When it comes to analyzing an investment property in terms of its potential profits for the investor, there are three main metrics that are calculated to determine the profitability of the investment:
Cash Flow
Cash flow is the main metric to base your real estate investment decisions on when it comes to profitability. The cash flow value of an investment property refers to the profit (positive cash flow) or loss (negative cash flow) that the investment property is resulting in.
A property’s cash flow, in its simplest form, is calculated as follows:
Monthly Cash Flow = Monthly Income – (Monthly Expenses + Monthly Mortgage Payments)
Related: 5 Ways to Create a Positive Cash Flow Income Property
Cash on Cash Return
Cash on cash return (CoC) is a metric that determines an investment property’s return on investment – or the amount of time needed for an investment property to cover its original cost, or to earn you back the amount that you had originally invested in it.
A property’s CoC is calculated as follows:
CoC = NOI (Net Operating Income) / Investment Costs
Note: Investment costs only take into account the down payment made on the property and not the amount of borrowed money.
Capitalization Rate
Also known as cap rate, this metric allows the real estate investor to understand a property’s return on investment independent of the financing method used. This value is used to determine the quality of an investment property, and to compare different investment properties with regards to their profitability in order to eliminate the bad choices.
This value should be used as an indicator when selecting a number of potential investment properties to invest in during residential property market analysis. It does not, however, indicate the value of an investment property once you’ve selected your financing method, and the cash flow metric is considered a more acceptable and accurate indicator of the profitability of an investment.
Simply put, the cap rate is your first filter when deciding on a few investment properties as candidates for your investment, and the cash flow is your filter to determine which of these properties is the best one for your investment. This is because calculating the cash flow requires more data to be collected and analyzed, such as expenses and mortgage payments, while the cap rate calculation only takes into account the expected NOI of the property and its price.
Cap rate is calculated as follows:
Cap Rate = NOI (Net Operating Income) / Property Price
Related: Cap Rate vs. Cash on Cash Return
Residential Property Market Analysis: Quantitative and Qualitative Comps
There are two main types of property comps (comparisons) when conducting residential property market analysis:
Quantitative Data
Quantitative data is data that indicates numbers such as the metrics mentioned above – cash flow, cap rate, and cash on rash return. This data is calculated for a number of different potential investment properties in order to determine your best choices in regards to profitability. Quantitative data does not take into account the types of investment properties and their characteristics such as the number of rooms, the square footage, the amenities, the location, etc.
Qualitative Data
Qualitative data is data that indicates the quality of an investment property in regards to the actual property and its characteristics and condition. Qualitative data is crucial during residential property market analysis as it is used to determine which properties should be compared to yours – normally, when comparing your investment property choices, you want to compare your property to other similar properties in the same area.
Qualitative data may include the following:
- Area and neighborhood
- Size and square footage
- Land area
- Number of bedrooms and bathrooms
- Age of property
- Amenities and special features: i.e., swimming pool, fireplace, garden, balcony, terrace, etc.
- Location of property with respect to the surrounding area: i.e., roads, grocery shops, schools, transportation, etc.
- Recent improvements and installments
Additionally, some of this qualitative information about an investment property can be used to determine or predict the property’s appreciation rate or potential.
Related: 6 Things to Know About Real Estate Appreciation
The real estate appreciation rate is the increase of an investment property’s value over time due to development of the area or the property itself, which usually results in the opportunity to sell the property in the future for a greater value than what it was purchased for, earning you a margin of profit that is independent of the property’s cash flow or passive income.
Residential Property Market Analysis: Mashvisor
At this point, you might be thinking to yourself – Who has time for all of that?!
Residential property market analysis can be a lengthy and daunting process. This, however, does not mean that there aren’t any alternatives.
Mashvisor is an online platform that can turn months of research and market analysis into minutes through the use of real estate investing tools that can not only help you find the best potential investment properties for your investment, but also includes a number of tools that can be used to do residential property market analysis based on qualitative and quantitative data and property comps. The platform can help you compare different properties in an area based on custom values determined by you, providing you with information to determine the best properties in that location. It also provides you with the property’s cash flow, cap rate, traditional and Airbnb occupancy rate, rental property comps, and cash on cash return, in addition to other metrics in order to help you make the optimal investment decisions within minutes instead of days, weeks, or months.