One of the most crucial skills for real estate investors is the ability to properly analyze a property. This trait helps investors make better informed decisions with potential homes, more accurately estimate a return, and avoid properties that are not worth acquiring. It’s also a skill that transfers to all types of real estate investments and strategies. Learning how to analyze properties is key to making a consistent return in real estate. Continue reading for our full guide that can help your clients analyze their next real estate property.
Analyzing real estate properties can be broken down into a few major categories:
It’s also important to understand the investor’s personal real estate strategy and how a potential acquisition fits into their overall goals.
The golden rule of real estate is “location, location, location”. This is because certain aspects of a property’s location will determine how much demand you will receive, and affect your final return. First and foremost is proximity to amenities such as shopping areas, transportation options, and good schools if you’re targeting family-oriented buyers. And, how quiet a neighborhood is will be an important factor for families looking for a place to settle down. If a location is undergoing economic development or job growth, you can expect property values to increase in that area. It can also be good to take a look at zoning laws in an area, as this can help you understand future development plans and how they might affect pricing.
Equally important is understanding how to evaluate the physical condition of a home. While certain fixes are easily taken care of, even by yourself if you have the skills, there are major issues that are better off avoided. Structural problems (like with the roof or foundation) and flood damage can be very costly to repair, and can eliminate most of your profit margin. Additionally, repairs to major systems like the HVAC, plumbing, and electrical wiring are better left to the professionals, or you risk even costlier fixes later the down line. It’s a good idea to look into the age of the property, and factor in the potential cost of repairs before making purchase decisions. Regardless, be sure to get a professional home inspection to identify these issues and prevent you from investing in the real estate equivalent of a lemon.
Real estate property values are heavily influenced by the trends happening across the nation, and in the specific market the property is located in. Understand that real estate follows a cyclical nature, with more buying activity in the spring and summer months than in the winter. It can be helpful to research comparable properties, known as “comps”, to get an idea of what typical prices for a property may be. Besides this, looking into statistics such as population and job growth can help you understand which way prices are likely to head in an area. Combining these factors should give you a better idea of the overall direction a property will trend, and help an investor make smarter financial decisions.
Last but not least is taking the time to break down the numbers for a particular a property. With a home flip, your return can be simplified to ARV (after-repair value) minus total investment costs. But for a rental investment, there are more terms you should take care to understand.
NOI (net operating income) refers to your total monthly income after all related expenses are considered. Your Cap Rate is calculated by taking your yearly NOI and dividing it by the price you paid for the property. A healthy cap rate will fall in the 4 to 8% range, with higher numbers representing greater risk, and lower signifying an unprofitable investment. Be sure to take time to calculate the Cap Rate for a property before making a purchase decision, as this will also tell you how many years it will take to break even on an investment.
We want to end with some additional tips on how to conduct research and analysis on real estate properties. It’s crucial to take time to conduct due diligence, and perform the steps we mentioned here, before placing a deposit on a property or committing to a purchase. You should build a thorough research process that you can go through for any property you’re considering acquiring.
It’s also good to have other professionals supporting you with your efforts. Building a team of reliable real estate agents, inspectors, and financial advisors will help you make better investment decisions. Joining real estate groups and attending local meetups are also some great ways to network with and find other like-minded professionals.
Finally, it’s important to recognize red flags when in the process of purchasing a home. For instance, if a home is priced incredibly low, it could be the case that it’s just too good to be true. Besides properties with hidden issues, a buyer that isn’t willing to negotiate on timeline or payment method can be a sign of potential problems with home. In these cases, it’s better to go with your gut and look for another property.
The easiest way to save on an investment is to obtain financing from a real estate lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance a real estate project, RCN Capital has competitive loan options available.