real estate deal

5 ways to analyze real estate deals

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Investing in real estate (whether as a mortgage, a buy-and-hold, or a fix-and-flip) is a perfect way to get closer to financial independence. It all begins, however, with a successful real estate contract. When people first begin investing in real estate, they are always nervous about making a mistake or purchasing a bad investment property. And, to be frank, it’s possible. The question on any first-time real estate investor’s mind is: “How do I find a profitable investment property?” We set out the real estate services to discover real estate deals for investment in a previous blog post. However, in order to determine if the offer you’ve found has the potential to profit, you’ll need to learn how to analyze it.

To put it another way, you must know how to do a real estate investment report. This study informs an investor whether or not it’s a good idea to continue with a particular deal by measuring precise real estate numbers. Don’t worry, you don’t have to be a mathematician or a genius to analyse real estate transactions. All you need is a basic understanding of the numbers to calculate and the tools to aid in calculating your return on investment (ROI). This is exactly what this step-by-step guide can assist you with!

1: Examine the potential investment location.

First and foremost, real estate investing is all about place, location, location (and will always be). If you don’t believe that, bear in mind that place has an effect on:

Property values are increasing.

The leases you’ll be able to charge

The tenants you’ll be able to attract

Some difficulties you can experience

The value of your home will increase in the future.

Needless to say, the position of your real estate investment has an effect on its profitability. Indeed, one of the most common reasons new investors lose money has nothing to do with the property itself and all to do with its location.

real estate location
Judge your location

As a result, before you buy a home, make sure it’s in a good location for real estate investment first!

How do you know if you’re in the right place to buy your next investment property? Well, there are a few things to watch for that will give you an idea of how the housing market in your chosen city/neighborhood is doing. Some of these components are on a broader scale, such as industry dynamics in the following areas:

  • Development in the population
  • Development of the labour market Growth of the economy
  • The neighbourhood’s price-to-rent ratio
  • Such small-scale influences on the local (micro) market include:
  • The desire to walk
  • Rates of crime and protection
  • Ratings for schools
  • Availability of public transportation
  • levy of taxes
  • Local ordinances

After that, you can use all of this data and knowledge to conduct a real estate market analysis and determine the strength of your venue. You’re looking for real estate deals in areas where the economics are favourable to both you and your end client. This enables real estate investors to demand the highest rents or prices, profit from the lowest vacancy rates, and gradually raise prices. To put it another way, these areas allow you to get the most out of your investment property.

This process can be made at ease by our real estate services. We’ll help to buy a property of your choice.

2: Collect the details you’ll need

Investing in real estate is a numbers game. That is to say, there is data and details available on each and every property for sale. And, as you would suspect, a real estate investment study entails taking those data and numbers pertaining to the property and incorporating them into your calculations in order to determine what kind of return it would generate. If you’re missing a number or the data you’re receiving is incorrect, your predicted returns would be incorrectly estimated. You could proceed with a real estate deal believing it will be profitable when, in reality, it will cost more than it earns, leaving you with a negative return.

As a result, investors must obtain and evaluate property data in order to assess the financial value of potential investment properties and make successful purchases. It can take some searching to find these figures, but it will be worth it when you use them to analyse real estate deals and get a more reliable estimate.

So, what numbers or property details should you be looking for? The real estate numbers required to run an investment property analysis could vary depending on the type of property you’re planning to buy:

Things to consider

  • Property Features 
  • Listing Price
  • Taxes
  • A policy of insurance
  • Utilities are a type of service that is provided by a company.
  • Fees for Homeowners Groups and Condominiums
  • Expenditures on capital goods
  • Level of Vacancy
  • Rental Charges
  • Create a Down Payment
  • Level of Interest
  • Term of Mortgage

These figures can be obtained by communicating with the seller or contacting a few local real estate agents. Faidepro is a more productive way to find such knowledge. We provide accurate property data to real estate investors, including all of the above and more! You’ll also have access to each property’s sales history, owner statistics, an expense breakdown, recent sales of similar properties in the city, neighbourhood-level details, and more.

This process can be made at ease by our real estate services. We’ll help to buy a property of your choice.

3: Calculate the Cash Flow for the Month

It’s time to start assessing the real estate deal after analysing the location and collecting the necessary data. The monthly cash flow of the investment property is the first factor investors measure in their study. Cash flow is a by-product of owning a rental property and leasing it to tenants in real estate investing. A profitable rental property can, by definition, produce positive cash flow every month. This enables real estate owners to earn additional income by renting their property after deducting all expenses – i.e., the income that you will hold. The higher the NET cash balance, the better the ROI, of course.

real estate cashflow

Calculate Rental Earnings

Deducting rental costs and expenses from rental revenue is all you have to do to measure the potential cash flow of a rental property. The catch is that you have to know how to calculate the future rental income from the investment property. There are many approaches to this. The most straightforward method is to use the 2 percent rule of thumb. According to this law, the rental property should be leased for 2% of the purchase price in order to cover costs and create cash flow. So, if you’re thinking of investing $100,000 in a rental house, it should rent for at least $2,000 per month.

Deduct Expenditures from Overall

Calculating real estate transaction costs is the second component of the equation. These are the expenses associated with operating and maintaining real estate investments. Mortgage payments, property taxes, insurance, maintenance fees, renovations, vacancy rate, and other property-specific expenditures must all be factored into the equation. As previously stated, this information can be obtained from the seller, a real estate agent, or by doing due diligence. Divide the annual rate by 12 to get the monthly rate if the cost is only paid once a year. To measure your monthly cash flow, add up all of your expenses and deduct them from your rental income.

Let’s assume the overall cost of owning this $100,000 investment property is $1,500 per month, as in the previous example. The property would produce a monthly positive cash flow of $500 in this scenario. Is this a fair monthly return? Your personal and investment ambitions, where you’re buying, and your real estate investment plan are all things to consider. Plus, not all buyers are searching for cash flow, and there are other (more important) metrics to consider when looking for the best real estate deals, which will be addressed in the next step. This process can be made at ease by our real estate services. We’ll help to buy a property of your choice.

4: Calculate the annual return on your investment (ROI)

The next step is to measure the rate of return, which is something that first-time real estate buyers should pay careful attention to in order to find good offers. You can measure your annual returns in a variety of ways, depending on how you invest in real estate. In this segment, we’ll go through the most relevant ones to be aware of:

Annual ROI

Multiplier for Gross Rent

When comparing real estate investment transactions, the gross rent multiplier is the most straightforward metric to use (GRM). The cumulative rent before taxes, insurance, and other deductions is referred to as gross rent. The GRM compares the purchase price to the rental’s annual gross rent potential. Simply divide the property’s price by its potential gross annual profits to arrive at this figure. For example, if you’re considering a real estate deal with a $100,000 purchase price and a $24,000 annual rent, your GRM will be 4 – as in, the purchase price is 4 times the rent.

What does this figure mean? This is the number of years it would take the income property to pay for itself in gross earned rent. This also shows how well a property produces revenue. A property with a GRM of 12 is, for example, much better at generating income than one with a GRM of 20. (at least on paper). As a result, as the gross rent multiplier rises, real estate deals become less appealing. Bear in mind, however, that GRM ignores operating costs, market volatility, and loan amortisation. As a result, you shouldn’t base your investment decisions solely on GRM!

Operating Income (Net)

This real estate statistic, abbreviated as NOI, describes how much money the rental property would earn after all operating costs are charged. In a nutshell, net operating income is gross income less expenditures.

At first glance, this may seem to be the same as the cash flow estimate, but there is a major difference between the two. The distinction is that net operating income excludes all land servicing costs (such as mortgage interest and payments) and income taxes. When analysing real estate transactions, however, these costs are factored into the cash flow estimate.

As a result, NOI refers to the amount of money a real estate investor makes before paying mortgage payments and taxes. There are two key advantages of measuring net operating income:

1. It shows how much money you’ll have left over after covering all of your day-to-day expenses to pay off your mortgage.

2. It gives you a clearer idea of the property’s potential profitability in relation to its cost, without taking into account expenses that are unique to each real estate investor.

Level of Capitalization

It’s virtually impossible to address real estate investing without considering the capitalization rate. This number, also known as the cap rate, measures an investor’s potential returns on a property if the investment were made in cash. This means it doesn’t account for any borrowing you might have used to fund your purchase. This helps you to conveniently compare the return on investment of one property to another.

Simply divide the property’s net operating income by its market value or purchase price to get the cap rate. Using our $100,000 rental property as an example, if the NOI is $8,000, the cap rate is 8%.

The annual rate of return on the investment property is expressed as a percentage. Cap rates are used by real estate investors to compare the investment potential of two or more identical real estate transactions. Although the cap rate formula is straightforward, there are various variables that impact cap rates, including property type, location, and interest rates. As a result, each investor establishes his or her own standard for what constitutes a good or appropriate cap rate. However, in general, you want to make this amount as high as possible.

Return on Investment in Cash

If you intend to use a loan to fund the investment property, this means:

1. You’ll be putting less money out of your wallet.

2. However, your mortgage payments will add to your monthly expenses (often called debt services)

As a result, you’ll need a measure to analyse the effects of this leverage and determine if it’s profitable for you. The cash-on-cash return is a statistic that is calculated by dividing the annual pre-tax cash flow by the total cash investment. Simply deduct your monthly mortgage payment from your NOI to get your annual pre-tax cash flow. The overall cash investment covers your down payment, closing costs, and rehabbing costs and other loan amounts.

Returning to our previous example, instead of paying the full purchase price in cash, you opted to put down 20% and take out a 15-year fixed mortgage with a 3% interest rate. Assume you paid $5,000 in closing expenses, bringing the gross cash investment in the real estate transaction to $25,000. You calculate that your monthly mortgage payments will be $715 ($8,580 annual debt service) using a mortgage calculator. Assume you have a $12,000 NOI, subtract the debt service, and you’ll have $3,420 in pre-tax cash flow per year. You’ll get a 13.6 percent cash on cash return if you divide that by the total investment.

Note: By using loans to fund real estate transactions, the rate of return on investment is higher since a general rule of real estate investing is that the less money paid up front, the higher the ROI.

5: Carry out a Comparative Market Analysis

The final step in real estate deal analysis is the one that brings everything together and gives you a final decision. Assume you’ve completed all of the above calculations and decided that the property for sale you’re considering has strong investment potential. But how do you know it’s valued at its true market value? After all, no investor wants to overpay for a property and risk a poor return on investment. This is why a comparative market analysis is important (CMA).

A CMA is used in the process of valuing real estate investments. It focuses on the property as a whole, as opposed to similar properties that have recently sold in the desired area. These properties are referred to as comparable (or rental comps for short), and they must have similar characteristics such as age, square footage, condition, and location. It’s important to remember that short sales and foreclosures can be avoided. This is due to the fact that these are “distressed” ideals that are not representative of consumer values.

Local brokers, home appraisers, and property managers may help real estate investors locate comparable properties. You can also look for them on your own by looking at real estate listings on famous websites.

real estate

Advantages of CMA

Real estate investors may estimate the property’s current value or the post-repair value (ARV) if they intend to flip it after conducting a comparative market study. One advantage of the CMA, as previously mentioned, is that it prevents you from overpaying for an investment property. Another advantage is that it assists in the identification of low-cost real estate and properties that are below market value (which can make for the best real estate deals).

It also helps in deciding what kind of rental rate you can demand for your investment property. Finally, looking at other property purchases will help you get a better understanding of how the housing market is doing and, as a result, ensure that you’re investing in the best real estate investment locations.

Final thoughts when it comes to analyzing real estate investment transactions, there’s a lot to think about, but if you do your homework and use the right resources, you won’t have any problems. Remember that our real estate services will help you to buy a property of your choice by analyzing real estate deals much easier and more effectively. Our real estate analysis software gives you access to the number of active and off-market real estate transactions, as well as their investment success, so you can research every housing market using big data.

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