Property investment can be an excellent way to grow your money, but you have to carefully analyze and assess each potential property before you buy it in order to make sure it’s a good deal.
To help you analyze investment property, we’ve created this step-by-step guide on how to evaluate real estate. Remember that every property has its own unique properties, so even if you plan to follow this guide as closely as possible, it doesn’t guarantee that you’ll find the best property for yourself!
Now that you’ve settled on a location, it’s time to start analyzing the property. There are many factors involved in determining the value of a property, but here are some of the most important ones:
Location – The location is one of the biggest factors in determining how much a property is worth. Neighborhoods with more renters than homeowners are typically less valuable than neighborhoods with more homeowners and fewer renters. Houses near good schools, parks, or public transportation can also add value to a home.
2) The property itself
Property value is the sum of many different factors and it can be difficult to determine a fair price in just a short period of time. When analyzing property, you should consider the following factors:
1. Size of the property– The size of the property will have an impact on its value because it affects how much rent can be charged per square foot. For instance, if your potential property is twice as large as the competitor, then you are able to charge two times as much for rent per square foot which means that your rental income would be double. On the other hand, if your potential property is half as large as the competitor’s then you are only able to charge half as much rent per square foot and your rental income would also be cut in half.
2. Condition of the property- A property’s condition has a significant impact on its value because it has an effect on how much upkeep there is. If a building needs repairs or updating, this can add costs to maintaining the building which takes away from profits. If a building does not need any repairs or updates, this saves money for the landlord and increases profit margins for both parties involved.
3. Age of the property – Older properties typically command higher prices than newer properties due to increased demand due to fewer available units but are often more expensive to maintain due to their age and outdated technology .
4. Area of the property- Location matters when investing in real estate. Properties with great locations tend to cost more when compared to those located near less desirable locations.
5. Competition- Some areas are more competitive than others when it comes to renting out buildings which leads them to commanding higher rents per square foot because renters want access to those buildings before someone else can get them first.
6. Returns on investment (ROI)- What sort of return do you want? Do you want high returns or low returns? It is important to know what type of return ROI you are looking for so that you don’t end up disappointed at the end of your investment term with minimal gains and a lot less money in your bank account!
7. Tax deductions- Many landlords receive tax deductions for owning rental property which reduces taxable income and lowers overall tax liability.
8. Renters insurance- Renters insurance covers the tenant’s belongings in case of fire, theft, vandalism or natural disasters. 9. Tenant history- Previous tenants may provide information about damage done to the property while they were living there, length of occupancy and whether they paid their rent on time which could lead to lower risks for prospective landlords as well as reduced maintenance costs in some cases.
3) The market
The market is where you can find out what the value of a property is. You can get information on the average rental price in your area, as well as how much properties are going for.
This will give you an idea of whether it’s worth your time and investment. When shopping for a property, be sure to know what you want out of the building before looking at any listings. It’s important that you consider factors such as location, size, and amenities when deciding which property would best suit your needs. Once you have an idea of what kind of property would work best for you, head to a real estate agent or broker who specializes in that type of property.
4) The numbers
1. Determine the property’s value. The best way to find this is by looking up recent sales in your area for similar properties. Keep in mind that a property can be worth less than its original purchase price, even if it has increased in value since then.
2. Research the community, including schools and crime rates, which will affect the home’s resale potential and rental prospects.
3. Check out how long it would take you to commute there from work, as well as get around town once you’re living there full time–a car might not be enough for some places!
4. Consider the cost of utilities, maintenance, and upkeep before making an offer on a property.
5. Take note of what amenities are nearby (public transportation? gyms? parks?)
6. Decide whether or not you want to renovate any existing features on the property before putting in an offer
7. Obtain any necessary permits for renovations or remodeling
8. Calculate how much money you’ll need each month to cover mortgage payments and associated costs
9. Get pre-approved for financing 10 Finally make an offer on a house
5) The team
A team of experts can be a valuable asset when buying an investment property. In addition to discussing the pros and cons of potential properties, your team should also be able to provide insight on the area’s level of crime rates, cost of living, and any other factors that might influence the decision.
For example, if you are looking at two properties with similar rental income potentials but drastically different prices, you may want a professional opinion as to which one will have more value when it comes time for resale. In this case, an appraiser would come in handy.
6) The exit strategy
Exit strategy is a key component to analyzing investment property. The more time and money you invest in an investment property, the more important it is to have an exit strategy. Exit strategies are typically categorized as either negotiated or forced liquidation.
Negotiated liquidation involves selling your property for the price you want to sell it for, while forced liquidation involves selling your property at market value, which may not be the price you want to sell it for. Some people might choose to rent out their property if they cannot find a buyer because this allows them to maintain some control over their properties while still making some money off of them.
7) The timeline
The timeline below is meant to guide you through the process of evaluating property investment opportunities. However, it is by no means exhaustive and you should always consider a property’s individual needs before making an offer.
1) Determine your risk tolerance – what are the risks associated with this property? What are the benefits? How much money are you willing to lose on this investment?
2) Consider the location – what does this property have in its favor? What’s wrong with its location? Is there a good supply of housing for sale nearby? Do any other businesses or services exist nearby that might benefit from having another business nearby (e.g., grocery stores)? Is there anything unusual about the neighborhood (e.g., noisy neighbors, high crime rates)?
3) Investigate comparable properties – what are similar properties worth near this one?
4) Check out the local market – how many people are moving into or out of this area? Is housing scarce in this area? How do other businesses fare here (e.g., grocery stores)?
5) Search for tax records and previous sales data – do they tell you anything about property values here?
8) The financing
The most important consideration for any real estate transaction is the financing, and the type of financing will depend on the buyer’s needs. There are a variety of financing options available, including conventional loans, FHA and VA loans, and grants. The following are some factors to consider when deciding on which type of financing is right for you:
-What type-of property do you want? -What amount of money do you need?
-Do you have good credit? -Do you have a down payment ready?
-What are your monthly income requirements? -How much risk can you afford to take on with this investment property purchase?
-Can your tax bracket handle the increase in income that may come from buying this property as an investment property?
9) The risks
Risks involved in analyzing investment property include:
-The area of the property may change over time.
-Different kinds of buildings and houses may be built nearby, which could affect the value of your property.
-Prices for property could go up or down depending on what’s happening in the economy, so you’ll need to be prepared for some uncertainty with your purchase.
-There may not be as many buyers interested in a specific type of property like apartments, condos, and vacation homes because they’re less common than single family homes.
-It can take a while before you know if your decision will pay off financially or if the property is worth more than you paid for it.
After you have a professional inspection on the property, you should have a general idea of the value of the property. You can then make an offer based on that evaluation.
The next step is reviewing any existing leases or contracts for the property and determining if they are still in effect or if there is room for renegotiation. If you are purchasing the property as an investment, it may be wise to keep your options open by buying it as a leasehold rather than freehold.