Before you can invest in real estate, your purchase needs to be evaluated just like you would evaluate any other potential investment you were thinking about adding to your portfolio. Conducting an investment property analysis is a way to make sense of that evaluation and weigh the decision of whether a particular property is worth pursuing. We'll show you what you need to know to conduct an investment property analysis, from start to finish.
How to perform an investment property analysis: First steps for success
When most people think about doing a real estate investment analysis, they assume the process will be mostly about analyzing metrics. While that's part of it, that's not the only step needed. Before you can crunch the numbers, take the time to gather some information about the property itself as well as the surrounding area. Here's how to get the information you need.
Evaluate the property's rental potential
First, evaluate the property's rental potential. You'll want to look at a variety of factors, including:
- Location: The area in which the property is located can directly impact its property value and performance as a rental property, so consider the location carefully before you make a purchase. Be sure to tour the area and take the time to find data about how property and rental values have changed over the years.
- Rental strategy: Next, you'll want to consider your rental strategy. Do you intend to rent to long-term tenants or short-term visitors? Look at what type of offerings are typically available in your area to get a sense of the competition you'll face with a particular rental strategy.
- Target tenants: Finally, based on your location data and rental strategy, try to decide who your target tenants for the property will be. If you do decide to pursue the property, there are a number of marketing strategies you can use to find a tenant for the property. Your goal should be to choose the strategy that will appeal most to your target tenants.
Perform a comparative market analysis (CMA)
After you've gathered that information, your next step is to perform a comparative market analysis on the property. As the name suggests, a comparative market analysis looks at other, similar properties in the area in order to determine the fair market value of the property. In this case, you'll look at recently sold comparable property (comps) to come up with a potential purchase price for your offer.
Additionally, doing a CMA will give you a fair estimate of the property value to use when analyzing metrics such as cap rate.
Finding the right investment property data
Finally, look into finding the right investment property data. In the world of commercial real estate, it's common for a seller to provide the buyer with a pro forma, which includes information about factors like the amount of rental income the property generates from monthly rent. While it's not standard practice for residential real estate, you can always ask the seller for similar figures and utility information.
Remember that any figures you receive from the seller are likely to be shown in their best light, so do your own due diligence when looking up figures for a property. You can find a lot of data relating to rental income and operating expenses in public property records or your local MLS.