Real Estate Analysis

Real Estate Analysis

A comparative market analysis is another name for a real estate analysis (CMA). It is essentially a study of the current market prices of properties that are similar to the property you want to purchase or sell. A CMA is a useful tool for determining the market worth of your own home, particularly if you are attempting to establish an appropriate selling price prior to listing.

A real estate analysis is the process of evaluating investment possibilities to determine whether or not they will provide the earnings you need to meet your investment objectives. This is probably the most important aspect of real estate investing success.

Real Estate Analysis

How To Conduct Real Estate Analysis

Property Valuation

Sellers of investment homes will always attempt to sell for maximum profits. Meanwhile, a real estate investor wants to purchase the home at a reasonable market price. It may be challenging to determine what a real estate property should sell for since valuations might vary considerably between two identical homes. So, the first stage in real estate investment research is to determine the actual worth of the property to prevent overpaying.

To determine the worth of residential real estate properties, you need to identify comparable properties (comps) (comps). Comparable homes are just other properties in the neighbourhood that have comparable features and were sold recently. By checking at what rental homes have sold for, real estate investors may receive a clue to the worth of another property. This is known as comparative market analysis.

For example, a single-family house in your area will increase in value if comparable single-family homes are increasing in value, and vice-versa. This enables you to evaluate how good or how terrible your choice of investment property is in contrast to the general performance of other investment properties in the region and the overall performance of the housing market.

Real Estate Analysis

Evaluate the property's rental potential

First, assess the property’s rental prospects. You’ll want to look at a number of variables, including:

Location: The area in which the property is situated may directly influence its property value and performance as a rental property, so examine the location thoroughly before you make a purchase. Be careful to visit the neighbourhood and take the time to gather statistics regarding how property and rental values have evolved over the years.

Rental strategy: Next, you’ll want to evaluate your renting approach. Do you plan to rent to long-term renters or short-term visitors? Look at what kind of offers are usually available in your region to get a feel of the competition you’ll encounter with a specific rental approach.

Target renters: Finally, depending on your geographical data and rental strategy, attempt to determine who your target tenants for the property will be. If you do decide to pursue the property, there are a variety of marketing methods you may use to locate a renter for the home. Your aim should be to select the approach that will appeal most to your target renters.

Real Estate Analysis

Select comparables for your real estate market study

Begin your first Real Estate Analysis research by choosing six similar homes. Three should be houses in the area that have sold within the past several months; then select three additional properties that are presently on the market.

When choosing comparables for your subject property check for:

  • Homes with the same amount of bedrooms and bathrooms.
  • Houses with square footage within 10 percent to 20 percent of your planned buy.
  • Property with a comparable lot size and form.
  • Select homes with a comparable initial building date, elevation (also known as architectural design), and number of storeys or stories.
  • Homes with comparable characteristics such as free standing garage, outdoor swimming pool or patio deck, and beautiful views.
  • Choose houses in the same area and ideally on the same street.
  • Select homes that are in the same school zone (since a low-quality school may have a substantial negative effect on value) (because a low-quality school can have a significant negative impact on value).
Real Estate Analysis

Assessing Expenditures

Now let’s compute our overall expenditures for this property. In general, expenditures split down into the following items:

  • Property taxes
  • Insurance
  • Maintenance—estimated depending on the age and condition of property
  • Management, if you hire a competent property manager
  • Advertising
  • Landscaping, if you employ a professional landscaping business
  • Utilities, presuming any part of the utilities is paid by the owner
  • Convert any monthly expenditures to their yearly costs to determine the property’s annual operating cost.
Real Estate Analysis

Common Costs

Every property owner will face these typical expenses—so it’s essential to understand how to estimate the cost.

Repairs: Repairs are tough to estimate since there are a number of factors that come into play. When calculating possible repair cost, look at the property itself. Generally, you may anticipate between 5-15 percent of the rent, depending on the quality and age of the house. And bear in mind that you may spend six months without a single repair and then get struck with a $1,500 water leak. You simply never know.

Capital expenditures: Also known as “CapEx,” this implies those costly big-ticket things that need to be updated every so often, such as roofs, appliances, and HVAC systems. For each key system, estimate the cost to repair, divided by the remaining lifetime, and put away that amount per month.

Property management: Property management firms usually charge a portion of the rent, coupled with a fee to rent out a property. These figures may vary depending on your local region, but in my area, property managers charge 10 percent of the rent and 50 percent of the first month’s rent when a unit is handed over.

Real Estate Analysis

Real Estate Analysis Real Estate Analysis

Calculating the Return on Investment

This is the phase when all the data you’ve collected will come together to provide a final estimate of whether or not purchasing the rental property makes financial sense. There are various kinds of ROI you may compute for real estate investment research. The most significant ones are:

Cash Flow: This is the amount of money remaining after all rental costs, principle payments, and interest have been paid. As a real estate investor, it’s essential to predict your future cash flow as you want to guarantee you’re purchasing positive cash flowing rental property to earn money in real estate.

Cap Rate: This is the ratio of the net operating income (NOI) over the property’s worth. Knowing the cap rate is excellent for rapidly comparing several properties in a particular region, evaluating market trends, and assessing the degree of risks connected with the investment property.

Cash on Cash Return: This is the cash you receive back relative to the cash you put in the property. It takes into consideration your down payment, closing fees, repair charges, etc. So, understanding the cash on cash return is very essential since it helps you know whether you’ll have the money to pay your expenses.

As you can see, each measure for determining the return on investment tells you something about your choice of rental property. So, it’s essential to account for all of them in your real estate investment research and not make a choice based on just one.

Real Estate Analysis

Real Estate Analysis Real Estate Analysis

Why It is Important To Do Real Real Estate Analysis?

You should always conduct a real estate market study, whether you are buying or selling a home and I’ll explain why. This study will help you understand the current housing market, how much homes comparable to yours are worth, and if it’s an investment property, how much you can charge for rent.

The information collected via a real estate  analysis or CMA helps the seller select a listing price and lets buyers evaluate whether the asking price is too high, low or fair. A CMA should always be performed to make sure both buyers and sellers are receiving a fair bargain, based on the worth of the property.

By analysing comparable homes on the market, you will be able to properly place a price on a property.

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