If you are a real estate investor looking to buy investment property, it is crucial to know how to properly analyze an investment property. If you do your homework in the beginning and buy property the right way, you will be able to make significant passive cash flow. Here are six ways to help you analyze your real estate investment
Determine what you would want to do with the property. Do you want to fix it up? Do you want to rent it out for cash flow? Do you want to fix and flip? Do you want to wholesale the piece of real estate? This will alter how you continue your analysis and ultimately what you do with your real estate.
Calculate the market value of the property, both in its current condition and in repaired condition. Make sure to look at recent comparable sales. It is important to know exactly how much you could sell the real estate for in the current real estate market. The value of the real estate after it has been repaired is called the after repair value (ARV).Also calculate market rent for the property, in fully repaired condition.
Estimate all expenses for the property. Look up property taxes. Estimate utility payments. Call your insurance agent to get an estimate for property insurance. Factor in vacancy by figuring the % of vacant units in the area and multiplying that percentage by the market rent. Also include property management fees (if applicable) and marketing costs. Maintenance costs will also need to be included.
Take your market rent and subtract all expenses, not including mortgage payments. From this amount, subtract the cash flow you desire. The remainder is the mortgage payment you can afford.
Using a financial calculator or a spreadsheet, calculate the loan balance on a mortgage with the payment from the previous step. Use current investment mortgage interest rates and the appropriate loan terms.
The mortgage loan balance plus any cash you have to put down is the maximum you should be willing to pay for the property. You can make this offer to the current owner. If the owner declines, move on. It's not worth wasting your time if the owner is not willing to sell at a price that works for you.