In this post, I am going to show the exact steps I take to evaluate a potential real estate investment property. The focus will be on single family residences, but this method can be applied to other types of property. Also, I am going to include the actual spreadsheet I use to input the obtained values, and work the numbers.
With the knowledge and tools that you will find here, you should be able to estimate your costs for a real estate property, and consequently, the profit you should expect to make from the deal. The only thing not included in this spreadsheet are any repair costs and holding costs associated with a potential real estate investment property, as this will be covered in a future post. Ok, let’s look at each of the steps carefully:
Real Estate Market Research
* Know the market value of the potential real estate investment property.
Have your trusty realtor run a CMA for the area over the last 6 months. If there is a lot of activity in the particular market you are in, have the realtor run the CMA for just the street where the subject property is located. The closer and more comparable the sold properties are to the subject property, the more reliable the information will be.
* Know the market rent for comparable investment properties.
Again, use your realtor for this one, or call other realtors in the area. Ask them what a comparable home might rent for in the neighborhood you are looking. Be specific; give them the square feet, number of bedrooms and bathrooms, garage capacity, and street where the real estate is located. Ask them if they have managed any properties in the area, and what they are getting in rent. Some realtors will provide rental listings online, or submit them to the local newspaper.
* Know the yearly tax amount of the potential real estate investment property.
Typically, this information can be found online. Check your appropriate county’s website for tax information. If you cannot find the website, give the county courthouse a call, as this is public information.
Run the Numbers
This is my favorite part. This is where the Potential Real Estate Investment Property Estimator comes into play, and you find out how low your offer must be for you to make the kind of money you want to make. Remember "The One Key to Real Estate Investing" – buy right.
1. On the left hand side. input the market value, market rent, and yearly tax amount for the potential real estate investment property that you have obtained into the appropriate cells of the spreadsheet. Hold off on inputting your offer amount for now.
2. The No of Units cell is reserved for when you are evaluating a duplex, fourplex or other multifamily dwelling. Leave this at 1 for single family residences.
3. The Closing Costs cell is a percentage that you would be willing to spend to sell the property (including realtor fees, doc fees, and any other fees to close the sale of the property). In general, I am not willing to pay more than 9% of the sales price for closing costs, although I am a realtor, so some of the expense will come back to me, 🙂
4. On the right hand side of the input area, input the necessary items per your lender. Be sure your lender gives you a good faith estimate so that you can count on the accuracy of the items.
5. Input your desired offer amount (I usually start around 20k less than the asking price, and work my way down from there). When the income/profit reaches the level you want in the automatic calculation area, PRESTO! You now have an offer you can feel good about.
Once you have your offer, I recommend submitting a slightly lower offer, just so that you have room to negotiate up if necessary. Be firm though, have a definite top price that you will not go over. Do not get emotional or you will lose.
Note: The default values provided in the Potential Real Estate Investment Property Estimator are estimates only.
Get more great finance and investing tips at Jeffry Evans’ personal finance blog. Get the spreadsheet on Simple Guide to Real Estate Investment Property Evaluation.
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