Introduction to Real Estate Investment Analysis

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Investing in real estate can be a great way to save on retirement or earn monthly cash flow, but it’s important to do your investment analysis before doing so. Knowing a property’s potential, or lack thereof, can help you decide if this is the right choice.

Investing in real estate is about more than just finding attractive properties, buying them and hiring tenants. In an ideal world, this might work, but in reality, many other factors determine whether your investment will perform as you planned, or whether it will fail completely.

Before investing in real estate, consider learning how to do investment analysis.

The most important numbers you need

To conduct an investment analysis of real estate, you will need information about the property itself, including its income and expenses.
Information about the property
First, you need information about the property. You must know:

Property income
If the property has already been an investment property, get as much information as possible about the potential income.

  • How much rent did the property bring in a month?

  • How often was the property empty?

  • Did this property generate any other income?

Expenses
Renting a property costs money. You are a homeowner, so you are responsible for all costs. Learn as much as possible about costs, including:

Purchasing and financing
You should also know the cost of buying and financing real estate, if applicable. How much does the seller ask for? How close is it to the appraised value?

How much will the financing cost if you need a loan? Does the property require renovation or can it be rented “as is”?

Where to find information about real estate

You need a lot of information to appraise a property, but where can you find it? If you buy property on a platform like Roofstock Marketplace, all information is laid out for you. Most buyers have to do very little research because Suspension does such a good job.

If you are more knowledgeable about the household, you can find information about the property in several places:

Salesman
The seller should be able to provide you with extensive information, especially information about the property itself. If you buy from another investor, he must also have income and expenses information. Don’t rely too heavily on the information they give you if they don’t provide evidence. The sellers are motivated – they want to sell the property in order to inflate the numbers a little.

Inspector or evaluator
You will invest a little money first, but before buying a property, it is important to know what condition the property is in and what is needed in it. A professional surveyor or appraiser can tell you if it is worth investing in real estate or if it will be too expensive.

Your lender or bank
If you are financing real estate, talk to your lender or bank about the costs. Know upfront costs such as paperwork fees, title lookup and appraisal fees, and internal costs such as interest and mortgage insurance.

Real estate management company
If the seller was using a property management company, you could get reliable data from them, so you knew you were dealing with “real” numbers, not inflated numbers. The management company can tell you how much income the property generated and the average expenses.

Should you use estimates or evidence?
Estimates can help you form an opinion about a property, but you shouldn’t use them to make real decisions.

The seller can tell you how much the property has generated or how much it costs, but unless you have specific details, don’t make a decision to buy or transfer the property. Sellers can inflate the numbers to make the property look more attractive, or make mistakes by making it less attractive without realizing it.

Having numbers that you can use to make decisions is important, which is why so many buyers love Roofstock Marketplace because it provides specific numbers that buyers can use to make important decisions.

Real estate potential assessment

Once you have the numbers, it’s time to pick them up to determine the property’s true potential. Here are the calculations you should take into account.

Net operating income
Net operating income is a universal metric: most investors use it to decide whether it is worth it or not. NOI is the income remaining after expenses, minus any expenses on the loan. In short, it is the total property income minus expenses.

You can look at NOI per month or as an annual rate by multiplying the monthly NOI by 12.

Net operating income is universal because it does not include debt service. Since each investor will have different debt service numbers, it is impossible to determine NOI across the board. If you want to make a quick decision, viewing the NOI can help you decide if a property is worth considering.

Cash flow
Cash flow is similar to NOI, except that all costs are included, including debt service. Cash flow is just income minus expenses, but it gets more detailed than just an analysis of rent (income) and mortgage (expense).

Each house has different expenses, but here are the general expenses:

  • Mortgage payments)

  • Real estate taxes

  • Homeowner insurance

  • HOA fees

  • Maintenance costs including lawn care and snow removal

  • Repair

  • Utilities (which you cover)

  • Property Management Fee

Cash flow is individual and depends on the type of funding you can get and whether you will use a property management company or manage the property yourself. The more expenses you have, the less your cash flow, and vice versa.

Capitalization rate
The capitalization rate is another unbiased number that buyers can use to generalize whether a home is right for them or not. While each region has a “good” and “bad” restriction rate, it averages between 8% and 12%.

But what is the maximum bet?

This is the NOI / Property value.

Since it uses NOI, it is independent of any funding or debt service on the property, which gives you a rough idea of ​​whether it is in your desired range or if you should look elsewhere.

The capitalization rate is the income you would have earned if you hadn’t financed real estate. This is a great way to determine if a property is a good investment for you. If you are not sure if this figure is suitable for a given area, take a look around and find out what level of capitalization is suitable for other properties. Once you know the average cost of living in the area, you can determine if this property is worth it.

Overall ROI
The overall ROI is the overall return on investment. Again, good and bad ROIs differ for every person, but you have to keep the numbers in mind.

Your ROI is your total return / investment.

Your total income should include all factors such as taxes owed or paid, capital earned in the year, and property gains. You can use the numbers provided by the seller or the data you found to calculate your potential ROI to see if it fits your needs.

Cash refund
Cash back helps you determine if investing in a home is the right choice or if you will get higher returns elsewhere.

You know how much profit you would make if you invested in CDs or even the stock market, or at least on average. You can use these basic numbers to figure out if it makes sense to invest your money in real estate or if you will have a higher rate of return if you invest elsewhere.

Calculate the yield on cash using the following formula:

Cash flow / Investments made

Your cash flow is all the cash you bring in for a year on real estate, and your investment is the money you paid to invest in real estate. Your cash outflow may include down payment, rehabilitation costs, taxes, insurance, and closure.

Other factors to consider

In addition to calculating the numbers, you should also think logically about real estate investments. Ask yourself the following questions:

  • What do you know about the area? If nothing else, do your research. Find out school ratings, crime rates, and the general mood of the area. Are the amenities sufficient? Is this a place for families or singles?

  • How will you finance your property? You cannot invest in real estate if you have no money. How will you finance it? Can you get approval?

  • Is the property in need of renovation? Know that you must invest in real estate before renting it out. Is he in complete disarray or does he just need a little more work? The money you spend on home renovations will affect your analysis.

  • How will you manage the property? Did you know that you do not need to invest only in your area? You can invest out of state using a platform such as Roofstock Marketplace… You then hire a real estate management company to manage the property for you, and you have a passive real estate investment.

  • Do you have money to support your home? Before investing in real estate, make sure you have a decent financial cushion. Even if you hire a property management company, the cost of all maintenance and repairs falls on your shoulders.

Getting help with real estate analysis

Analyzing real estate can seem like a daunting task. There are many numbers, but there are not so many places where you can find them. If you rely on sellers, you may be looking at skewed numbers and investing money, thinking that you will make more than you.

But if you do this work yourself, it can take up all of your time and you may still not get the right answers. The key is to get the right level of support. Roofstock Marketplace great example of support.

Their professionals will do all the due diligence for you, including the inspection and appraisal of the property. They cover all the information you might need to decide if a property is right for you. They even include analyzes, graphs and images so you know exactly where you are.

Final thoughts

Don’t buy a home without analyzing its potential. While no one can predict the future, you can use historical and current data to predict how real estate will perform in the future.

Knowing as much detailed information as possible about the property, the area and its potential will help you make a suitable investment. While some factors are personal and / or unknown, there are enough factors to help you determine where and how you should invest your money.

For more information on Roofstock services click here

See also: How to invest in real estate online

Image author David Schwarzenberg from Pixabay

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