Quickly analyze real estate like a seasoned investor with these 6 tips.
#1. Quickly analyze real estate by the purchase price
The purchase price is the first variable you can quickly find on any listing.
Keeping it simple: what are they asking, and is it a good price?
The initial price is only the first variable, as the other variables will influence if the asking price is a good deal. If the asking price is under your initial budget, that’s a strong starting point.
#2. Investigate how many units there are in the prospective property
The second variable you can find quickly on any listing is how many units there are in the prospective property.
Now that you know the asking price and how many units there are, you can quickly calculate the cost per unit. Using a cost-per-unit analysis, you can understand the home’s value and where the property sits in the market. Based on these calculations, you can see if there is a good value or if the property is overpriced.
#3. Seek the potential rental income on the listing
The third variable you can investigate is the rental income on some listings. This information may be readily available online, but remember, these figures can be exaggerated. To exercise caution, ask your local real estate agent or your local real estate investor to confirm the projections.
Note: we, as investors, wouldn’t trust most listing projections.
A good practice is to contact the listing agent directly. With our clientele, we typically have that information readily available. However, if it’s not at our fingertips, we contact the listing agent directly to understand the rental income better.
Furthermore, we do what we can to understand the specifics included in the lease.
- Is it month to month?
- Is there laundry income?
- Storage income?
- Additional parking income?
- Other sources of income associated with purchasing and owning this property?
The more you ask, the more context is provided to assess an accurate depiction of this rental property.
#4. Analyze real estate by understanding the expenses of the property
The fourth variable you will want to learn about is the property’s expenses. Most listing agents or sellers that are listing multi-units are going to have their expenses and their income sources all in one file. However, we recommend asking for both of them simultaneously if they’re not readily available.
Take caution if the seller/listing agent is going off of projections on expenses; take those with a grain of salt. Use your own projections, or, work with an experienced real estate agent or investor to better understand how accurate those projections may be.
#5. Calculate cap rate
Now that you have all your expenses and income for the particular property, you can calculate the fifth variable to look at listings quickly, which will be your “cap rate.” A cap rate is your net operating income divided by the asset’s purchase price or value.
The higher the cap rate, the more “profitable” it is for the property’s income. The lower the cap rate, the more expensive the property is for the income it’s bringing in.
Typically, you want a higher cap rate. If the cap rate is lower, you will want the ability to improve it in the future, meaning your real estate investment would be more profitable.
#6. Evaluate the location of the property
The sixth and final variable you want to look at is the location. Using the first five variables, you have the context to analyze this deal quickly. You have the asking price, cost per door, income, expenses and the cap rate. The property’s location will make or break the validity of those variables.
For a premium area, you’re probably going to pay a bit of a higher purchase price for the renters you’re getting because it’s supposed to generate more income in the long term. It will likely appreciate better in comparison to less desirable areas. Furthermore, if you have a location that offers a few options for what you can do with the property long-term, you may pay a little bit of a premium.
What is most important here is that if you are unfamiliar with the local market, ensure you’re working with a local professional with experience in these deals. They will be able to advise you properly on which areas are worth targeting and which areas may be worth paying less or more depending on your goals and your capacity.
In conclusion, this is how to quickly analyze a real estate investment in a few minutes or less. Start with these six steps to find your ideal investment property.
If you’re ready for a deep property analysis or looking for some guidance, contact us.