Welcome to the topic “SMART WAYS TO ANALYZE A REAL ESTATE DEAL.”

Before we get started, if you want to analyze your property quickly, then Click Here to do it. In this article we will be discussing every single step involved in analyzing a real estate deal, so make sure to give it a read first!

Property investment is a great way to achieve financial freedom. However, you have to be aware that it all starts with an acceptable real estate deal. When people are new to real estate investment, they often worry about making a mistake or getting stuck with a bad investment.

You must know how to perform a real estate analysis. When you calculate the specific real estate numbers, the research helps you to decide as an investor whether or not a deal makes financial sense. You don’t have to be a master or a genius of numbers to analyze such real estate deals. You simply need to know which figures to calculate and have the right tools to help you estimate your return on investment (ROI).

Steps to analyze real estate deal

The following steps will help you to learn how to analyze the return potential of any type of real estate investment deal.

Analyze the investment location

The first step is to analyze the investment location. You have to understand that location impacts the prices of property, the rents that you can charge, different problems that you may encounter, the tenants that you will be able to attract and your property appreciation in future.

The location of the real estate investment affects how profitable it is going to be in the coming days. The site can be one of the biggest reasons that new investors end up losing their money, and it has nothing to do with the property itself. The right property in the wrong location could be a catastrophic investment.

The question is, how can you be sure that your next investment property is in an ideal location? There are a few factors that you have to consider in order to determine how the market is performing in the area of your choice. There are some large scale elements to consider, such as the market trends, how have house prices trended in recent years? Some factors are more localized – for example, what are the crime rates in the area? How good is the local transport?

All of this information and data can be used to perform a real estate market analysis and strength evaluation of your location. You are always looking for real estate deals in locations where the economics benefits you and also your customer. This gives real estate investors the opportunity to maximize prices and rents, get the lowest vacancy rates and keep increasing costs over time. Therefore, it is the location that allows you to make the most profit from your investment property.

Gather useful data

Investment in real estate is a numbers game, which means that there is information and data out there that can be found on every property for sale. This data can be used to perform a real estate investment analysis relating to a property, and all of these calculations can be used to find out what type of return on investment can be achieved.
If your data is inaccurate, then this will lead to a completely false estimation of the projected returns. So, there is quite a possibility that you may end up moving forward with your real estate deal thinking that it is profitable for you, but in reality, it might be costly for you and you will record a negative return on your investment.

Gathering and analyzing property data is key for investors to find out the actual value of potential investment properties and to make profitable purchases. You will have to do a little hard work to find these numbers, but it will be worth it if you happen to get a more accurate estimate while analyzing any real estate deals.

The necessary data will be related to property characteristics, listing price, insurance, utilities, vacancy rate, rental rate, down payment, interest rate and much more. You can get hold of these numbers by contacting the seller or calling a few real estate agents. By using Deal check software, you will be able to obtain data on both long-term and short-term property listings, and get access to the sales history, owner info, and breakdown expenses for each property.

Calculate your monthly cash flow

After carefully analyzing the location and getting all the needed numbers, it is now time to evaluate the real estate deal. The first thing that most investors calculate in their analysis is the monthly cash flow of the investment property. In real estate investment, cash flow is considered a byproduct of owning a rental property and then leasing it to tenants.

A profitable rental property should naturally be able to generate a positive cash flow every month. This helps real estate investors to reap extra income by renting their property after all expenses are discounted, so the net income can be pocketed. The following are the ways that investors run a cash flow analysis on real estate deals.

Rental income calculation

It is quite simple to estimate the potential cash flow of a rental property. You only have to deduct the rental costs and expenses from the rental income. The main idea is that you must be aware of is how to estimate the property’s potential rental income generation. The simplest can be going for the 2% rule of thumb.

Subtracting the expenses

Calculating the expenses of real estate deals is the second part of the equation. These are the costs that are necessary to maintain and run real estate investments. Some of these expenses include property taxes, mortgage payments, management fees, repairs, vacancy rate and other costs that have to be included in these expenses. You can add up all the costs and then subtract the expenses from the rental income to get the monthly cash flow.

Calculate the annual return on investment

This part is significant, as first-time real estate investors have to pay close attention to get better deals by calculating the rate of return. It depends on how you are to invest in real estate, but there are different ways to calculate your annual returns. The most important ones are:

Gross net multiplier

If you want to compare real estate investment deals, the gross rent multiplier (GRM) is considered the most straightforward way. The GRM is the total rent minus expenses such as insurance, tax and other deductions. GRM basically compares the purchase price to the annual gross rent that can be generated by the rental.

Net operating income

Net operating income (NOI) explains how much money the rental property will be able to make after operating expenses have been paid. The net operating income equals the gross income minus all of the costs.

Capitalization rate

It is impossible to talk about real estate investment without including the capitalization rate. Cap rate estimates the potential returns on the property by the investor, with the assumption that the investment was made in cash. It doesn’t take into account any financing that you might have used to leverage your purchase.

Cash on cash return

If you have plans to finance the investment property with a loan, then your upfront costs will be lower, but you will have additional monthly expenses through repayments. You are going to need the cash on cash return metric to calculate it, and divide the annual pre-tax cash flow by your total cash investment.

Run a market analysis

The last step to analyze your real estate deal is the one that connects the prices and provides you with the final verdict. Let’s say that you have made all of the aforementioned calculations and have decided that the property you are interested in has good potential for investment.

You would like to know that the price of the property is at the fair market value because no investor wants to overpay for any property and lower the chances of getting a high ROI. That is why you have to perform a comparative market analysis (CMA).

A CMA is a real estate investment valuation process. It involves comparing the property to other similar ones that have been sold recently in the same location. These properties are known as “comparables” and must be identical in different features such as square footage, condition, age and location, amongst others.

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Conclusion

You have to consider various aspects when analyzing real estate investment deals, but if you perform an accurate analysis of the investment, then you don’t have to worry about anything. With a proper real estate analysis, you will be able to study any housing market by accessing many active and off-market real estate deals and also their investment performance. Our real estate analysis software helps you to analyze properties, helping you to estimate your profits and find the best real estate deals for you. You can visit our link by Clicking Here. If the math looks acceptable to you, then you can make an offer and get the property under contract to strike an excellent real estate investment.