What Your Real Estate Investment Analysis Should Address and Answer

real estate analysisA real estate investment analysis routinely gives real estate investors a basis for setting rent schedules, estimating income and operating expenses, as well providing the investor with a detailed description of a rental income property’s physical layout and marketplace position.

So it seemed like a good idea to take a closer look at what a real estate investment analysis should address and answer so less-experienced real estate investors engaged in real estate investing would have a better understanding of what to look for before they make an investment.

The list is not exhaustive, but it does touch upon the most crucial issues real state investors typically examine before making an investment.

1. How the Property Compares to the Market

This is a fairly straightforward assessment. This is where real estate investors consider how the property is currently being used and then would compare it with other similar-type income properties in the local market.

If the subject property is a multifamily apartment building, for instance, then you would want to know how the subject property measures up to other multifamily apartment buildings recently sold in the local market. Namely, is it as good, inferior, or heads and shoulders above the rest? Does your assessment apply to the rental property’s current condition or with minimal alterations?

2. Holding Period Expectations

This concerns the real estate investing objectives set by the investor and the period of time that he or she expects to hold the real estate investment.

Some real estate investors, for example, might simply want to add value by increasing the rents and then re-selling the investment 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.

If your real estate investing objective is to buy and sell immediately then you must be certain that the numbers reflected in your real estate investment analysis support a profit after all costs to acquire, perhaps rehab, and then re-sell the property; moreover, that the marketplace would in fact favor a sale.

In the case of long term ownership, you must be sure that your cash flow projections revealed are reasonable (not overly optimistic) and will likely produce the amount of income you desire from your investment.

3. Physical and Economic Characteristics

This concerns the type of rental agreements already in force that might impede or inhibit the real estate investor from making substantial improvements to the property.

If the subject property has long term leases already in effect, for instance, you get some amount of financial security but essentially cannot as readily make improvements that might warrant higher rents and perhaps add value to the investment property. Whereas month-to-month rental agreements might not feel as financially secure but at the same time they offer you an opportunity improve the space when they become vacant and in turn to seek out tenants willing to pay higher rents perhaps on longer term leases.

4. How the Property Stacks Up to the Competition

This issue of your real estate investment analysis concerns the subject property’s location, age, type of construction, condition, unit size, amenities and features – with an eye upon specific differences compared to other similar rental property in the area.

In this case you need to evaluate those issues about the subject investment property that cannot be changed along with those that can in order to determine the impact they might have on your profitability.

Issues like location, for example, are unchangeable, therefore you must make an evaluation whether the location is a positive feature or will continually present challenges for you to keep the units occupied at market rents. The subject income property’s condition, on the other hand, can be dealt with but will it improve the property’s position in the market, and at what cost?

5. The Property’s Operating Expenses

This concerns those expenditures that keep the property in operation such as utilities and trash, repairs and maintenance, advertising expenses, licenses and fees, and so on.

This is vital for you to know and validate because operating expenses will directly affect your cash flow, rates of return and profitability. In this case, you want to be sure that your property analysis relies on realistic numbers for all your projections.

The current owner might indicate an operating expense ratio of 40%, for instance, whereas you might discover upon closer evaluation that the operating expense ratio is more realistic at 44%. Without a sound real estate investment analysis to validate the rental property’s operating expenses you could make an unwise investment decision that will end up biting you in the wallet.