A Good Way to Analyze Real Estate Deals in These Troubled Times
Let me ask you a question: How long do you spend picking out clothes each morning? Probably longer than most investors spend doing the math for real estate investment analysis. Unfortunately, people choose deals based on intuition, not analytics. In real estate investing, money is made when the property is purchased, not when it is sold.
That is another way of saying that the more thoroughly you analyze real estate deals, the greater your odds of success. Here is how to analyze real estate deals in these troubled times, even if you are a brand new property investor.
Step 1: Analyze the Investment Location
First things first, real estate investing is (and will always be) about location, location, location. If you do not think that is true, keep in mind the fact that location impacts:
- Property prices
- The rents you can charge
- The tenants you’ll attract
- Any problems you may encounter
- The appreciation of your property in the future
Step 2: Gather the Necessary Data
Real estate investing is a numbers game. Meaning, there is data and information out there that you will find on each and every property for sale. And, as you can expect, a real estate investment analysis is made up of taking such data and numbers that relate to the property and using them in your calculations to ultimately find out what type of ROI it will make.
So, what are the numbers or property data that you need to look for?
- Property Characteristics
- Listing Price
- Capital Expenditures
- Vacancy Rate
- Rental Rate
- Down Payment
- Interest Rate
- Mortgage Term
Step 3: Calculate Monthly Cash Flow
After analyzing the location and gathering the needed numbers, the time has come to start evaluating the real estate deal. The first thing investors calculate in their analysis is the investment property’s monthly cash flow. In real estate investing, cash flow is the byproduct of owning a rental property and leasing it to tenants. Naturally, a profitable rental property should make positive cash flow every month.
Step 4: Calculate Annual Return on Investment
And now comes the part that first-time real estate investors need to pay close attention to in order to find good deals – calculating the rate of return. Depending on how you are investing in real estate, there are multiple ways to calculate your annual returns.
- Gross Rent Multiplier
- Net Operating Income
- Capitalization Rate
- Cash on Cash Return
Step 5: Run a Comparative Market Analysis
The last step for analyzing real estate deals is the one that connects the pieces and gives you a final verdict. Say you have done all the above calculations and reached a decision that the property for sale that you are eyeing has a good potential for investment. But how do you know that it is priced at fair market value? This is why you need to perform a comparative market analysis (CMA).
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