A rental property analysis gives real estate investors a basis for setting rent schedules, estimating income and operating expenses, and provides a detailed description of the rental property’s physical layout and marketplace position.
It seemed needful, therefore, to acquaint those of you new to real estate investing with the most common information real estate investors expect a rental property analysis to provide to make a real estate investment decision.
1. How the property fits in the market.
This is a fairly straightforward assessment that considers how the property is currently being used and then compares it with other similar-type properties in the local market. If the subject is a multifamily apartment building, for example, then investors would want to know how it compares to other multifamily apartment buildings. Is it just as good, inferior, or maybe heads and shoulders above good (whether in its current condition or with minimal alterations)?
2. Property expectations during the holding period.
This concerns investment objectives and the period of time the real estate investor expects to hold the investment. Whereas some investors, for example, might simply want to add value by increasing the rents and then re-selling for a profit immediately, others might have their sights on retirement and are looking for long-term ownership as a means to generate future supplementary income.
3. Physical and economic characteristics of the property.
This concerns the type of rental agreements already in force that might impede or inhibit the investor from making substantial improvements to the property. Whereas month-to-month rental agreements might not feel as financially secure as longer term agreements, for example, at the same time they offer an opportunity improve the space when they become vacant and to seek out tenants willing to pay higher rents perhaps on longer term leases. Likewise, when long term leases are already in effect, some amount of financial security is given but impedes improvements that might warrant higher rents and perhaps add value to the rental property.
4. Comparison of the property to the competition.
This concerns comparing the location, age and type of construction, condition, size of units, and amenities and features with an eye upon specific differences to the competition. Does the subject investment property stack up well against other properties, or not so well? Along these same lines, could minor changes to, say, property management, for instance, improve the property’s position in the market? Or are their issues like location, for example, that are unchangeable and will continually present challenges to keep the units occupied at market rents?
5. The property’s operating expenses.
This, of course, is vital because operating expenses directly affect cash flow and profitability. In this case, investors include those expenditures that keep the property in operation such as cost of utilities and trash, repairs and maintenance, advertising expenses, licenses and fees, and so on. Equally important is the use of realistic numbers for rental property analysis projections.