How To Analyze Real Estate Deals Like The Pros

Before you buy real estate, you must analyze it, just like you would analyze a stock purchase before investing in the market. Just because a house looks like a good deal doesn't mean it is - you must gather all your information, crunch the numbers and then figure out if a real estate deal is right for you.

The Information You Need To Analyze Real Estate Deals

To analyze real estate deals, you must gather all the necessary information. The information you need includes information about the property, its costs, potential income, and the financing details.

Property Data

Get as much information about the property as possible. Square footage, features, year it was built, any upgrades it’s had, and any other details you can think of. You need the property details to get a reasonable estimate of its fair market value. This will be your launching point when creating an offer to buy the home should you decide it’s suitable.

Purchase Price

Knowing the property’s purchase price or asking price is important too. This tells you around how much you must invest in the property if you buy it. While you don’t have to pay the total asking price, chances are you’ll pay close to that amount. You can always bid less, but know that the seller wants to get as close to the asking price as possible.

Rental Income 

If the home is currently a rental property, look at its historical rents. Has the rent been steady, or has it increased/decreased over the years? The rental income will play an important role in deciding if an investment property is right for you. If you buy a turnkey property, you’ll buy a property with tenants in it already, so knowing the rent is an important detail.

Average Expenses

Investing in property costs money. Not only does it cost to buy the property, but you must maintain it and pay the taxes and insurance. Knowing the average cost to keep the property plus its historical tax and insurance costs will help you determine if a property is a right choice for you.

Financing Information

If you finance the property, you’ll need the mortgage data. How much will you put down on the property? This is your cash investment. You also need to know the cost of the mortgage - principal and interest as this takes away from your cash flow and should figure into your decisions.

Where To Find The Necessary Data

You need a lot of data to determine if a real estate investment is a good one. While some of the data is public record, the rest you may have to dig for a little bit or get support from a platform like Roofstock Marketplace. When you look at and buy properties on Roofstock, you have access to top-of-the-line data about the property, making it easy to determine if it’s a good investment.

Here are the top places to find the data you need:

• County recorder's office - You can get a lot of information about a home from the county recorder’s office, including the property’s tax history and property data. Many recorder’s offices have the information available online so that you can access the data at your convenience.
• Appraisers or real estate agents - Your local appraisers and real estate agents can help you get information about a property, including its average rental income, measurements and property data, and an estimated value.
• Sellers - The seller should have most of the information you need. Don’t just take their word for it, though; ask for actual data. If the seller doesn’t have records of rental income, maintenance costs, or other essential property data, consider talking to the property management company that handles the property.
• Roofstock Marketplace - Roofstock Marketplace does all the due diligence on the properties they list. You’ll get the data and even the crunched numbers so you know if a property is a good investment for you. 

Crunch The Numbers

Once you have the data above, you can crunch the numbers and compare them to the baselines set for the industry to help you make a buying decision.

Figure Out the Property’s Cash Flow

Cash is king. Without cash flow, why would you own a rental property, right? To calculate your property’s cash flow, you simply need its gross income and its total expenses. Subtract the costs from the income and what you have left is your monthly cash flow.

What do you include in the cash flow? Here’s a list, but every property will differ:

• Mortgage payment
• Property taxes
• Homeowner’s insurance
• Mortgage insurance (if applicable)
• HOA fees (if applicable)
• Utility costs
• Property management fees
• Estimated vacancy rate (assume a 5% - 10% vacancy rate)
• Maintenance costs

Total these expenses and subtract them from the property’s rental income. If the property is already rented, it’s easy to tell the rental income. If not, use a source like Roofstock Marketplace to find the average rent for the area and use it as your guide in determining the potential cash flow.

If the property has any other rental income, make sure you include it, such as renting out a parking space or any other services you may provide your tenants. 

No one can tell you what the ‘right’ cash flow is - you have to determine what’s profitable for you or what you’re comfortable accepting. For some people, $500 a month is great, and others want $1,000+ a month to invest in real estate. 

Look At the Cash-on-Cash Return

Your cash-on-cash return helps you compare your rate of return to other potential investments. You can decide if it’s worth investing in real estate or if you could make more money elsewhere.

To calculate the cash-on-cash return, first, you must determine how much you spent on the property to acquire it. If you financed it, the cash you spent is the down payment plus any closing costs. If you renovated or fixed up the property, including the money paid. 

Next, you need the property’s annual cash flow from the step above. Take the monthly cash flow and multiply it by 12 to get your annual cash flow.

Divide the annual cash flow by the cash investment to get your cash-on-cash return. For example, if you invested $75,000 and your annual cash flow is $6,000, your cash-on-cash return is 8%.

Figure Out the Cap Rate

The cap rate is a universal metric used by most real estate investors. It excludes the cost of your mortgage financing, allowing you to see the true return of investing in a property. Since you don’t know what your mortgage will look like or if you’ll pay cash for a property, the cap rate is an unbiased opinion of the potential cash flow.

The higher the cap rate is, the better the investment is - here’s how to calculate it.

Property’s cash flow/Acquisition cost = Cap Rate

The cash flow, in this case, will differ from the cash flow above. You won’t include the mortgage payment in this figure - you’ll only include all other expenses. The acquisition cost, however, includes closing costs and any costs you incurred to renovate the home.

Other Factors to Consider

Sometimes it takes more than numbers to determine if a property is a good investment. Once you calculate the numbers above, consider these factors:

Location - Is the property in a good location? Do renters like the area? Look at the crime rate, school ratings, and amenities in the area to determine if it’s an area that would attract renters.
Mortgage payment - Can you afford the mortgage payment without the rental income? With a 5 - 10% vacancy rate, chances are you’ll have to cover the mortgage payment periodically. Make sure you can afford it without jeopardizing your other financial obligations.
Property management - If you invest in real estate outside your area, you may want to hire a property management company. When you work with Roofstock Marketplace, they match you with quality property management companies. If you find a company yourself, do your research, make sure they are legit and that you can afford the costs.
Comparable properties - Look around the area - are there other rental properties? Do they hold their value and stay occupied? What about the sales price of recently sold properties - are they in line with what you’re offering on a property? 

Where to Find Real Estate Deals Like the Pros

Now that you know how to evaluate real estate deals like the pros, it’s time to find real estate deals like the pros.

Work With a Real Estate Agent

If you’re lucky enough to find a real estate agent who specializes in investment properties, you can use their expertise to help you find the best deals on the market. The idea is to buy an undervalued property, fix it up, and rent it out, earning cash flow and appreciation.

Network

When you invest in real estate, word-of-mouth is golden. The more people you tell you to invest in real estate, the more opportunities will knock on your door. You never know when a friend of a friend will need to sell their house fast and will take any offer or when a relative of a friend is making a short sale. Get the word out.

Roofstock Marketplace

Roofstock Marketplace offers homes for sale by other investors. They are often turnkey properties (properties with tenants), making the new owners instant landlords. Roofstock provides a wealth of information to help buyers determine if a property is a good investment for them. They do all the due diligence, and it only costs buyers 0.5% of the purchase price to buy a property on the platform.

Work With a Wholesaler

If you don’t want to seek the deals out, work with a wholesaler who finds the deals and passes them along to investors like you. Wholesalers increase the price a bit, so they make a profit, but you don’t have to do the work of finding the properties, which is often worth the extra expense.

Evaluating Real Estate Deals Like a Pro

You don’t need years of experience in real estate to analyze real estate deals like a pro. It just takes a little data and some number crunching to determine if a property is a good investment for you.

Get as much information about the property, its costs, and potential income as you can to make an informed decision before buying an investment property.

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