Purchasing an investment property requires a lot of research to ensure that the venture is worth it. There are several factors you can consider before your final decision, and understanding what they are and how to analyze them will keep you from investing in a rental property that won't be profitable.
Conducting investment property analysis can be simple enough if you know what to look for. While hiring an expert is also an option, you can do it yourself with a little guidance. Read ahead, and you can learn whether you're making the right decision in real estate investing.
Investment Property Factors to Consider
Property's Purchase Price
Determine the initial cost of the real estate investment property and its associated fees. Your ability to acquire the property may depend on your financing options and whether you can afford the mortgage payments. Remember to include closing costs and other expenses in addition to the property price.
Property Condition
It might require more repairs and maintenance if it's an older property, which will only add to the costs you'll pay to increase its market value. If the damages or wear and tear are extensive, it may not be worth the investment anymore, and you'll be better off looking for other properties in the real estate market.
Size and Layout
The square footage and layout of a residential rental property matter to potential tenants, so you must consider them carefully. How many bathrooms and bedrooms does it have? Is it an open floor plan? Are the rooms spacious? These factors will ultimately influence your rental price.
Amenities
Amenities can also help you compete with similar properties and set competitive rental prices. Popular amenities like parking spaces, laundry facilities, and outdoor space are property features that contribute to the rental appeal, which lets you find more renters for your residential property.
Capital Expenditures
Repair costs can sometimes be unavoidable. Future property owners must anticipate and calculate how much they might spend on significant repairs and replacements or even new HVAC and plumbing systems. This helps with property appreciation, allowing you to raise rental rates.
Market Factors to Consider
Rental Rates
Conduct a comparative market analysis to learn the optimal rental price in the area, which can also help you estimate your income potential. This will be important when you calculate your return on investment (ROI) and determine if you'll get a positive cash flow.
Vacancy Rates
The vacancy rate in the area is a crucial variable in determining rental demand. Low demand can lead to low rental income, which can be problematic because you'll need it for real estate expenses like mortgage payments, and falling behind can mean losing your investment property.
Market Trends
Comparing the local rental market trends to the features of the rental property you aim to purchase can also determine whether your investment property would attract tenants. While this might be more difficult to conduct for first-time buyers, you can always consult real estate agents or property managers for insights about the rental market and tenant behavior.
Neighborhood
Rental units become more desirable when close to certain amenities. With single-family homes, for instance, potential tenants might prefer rentals close to schools. Young professionals could prefer properties close to transportation.
Financial Factors to Consider
Gross Rental Income
Your gross income is important for calculating your net operating income. Real estate professionals use this factor to estimate property value via the Gross Rent Multiplier (GRM) tool. Gross rental income is the potential income before operating expenses.
Net Operating Income (NOI)
Your property's net operating income basically tells you whether you have positive or negative cash flow. It's your total rental income minus monthly operating expenses. This factor is necessary to conduct cash flow analysis.
Monthly Cash Flow
You'll get the cash flow amount by deducting mortgage payments from your NOI. This is one of the determinants of whether your real estate investment is paying off or not. Property investors must always look into the cash flow statement to make necessary adjustments for a positive cash flow.
Cash-on-Cash Return
The formula for cash-on-cash return is your annual cash flow minus your total investment. These two variables are calculated using several other factors, such as gross scheduled rent, vacancy, operating expenses, and more, so it is advised that you consult property managers or real estate experts to avoid miscalculations.
Capitalization Rate
The cap rate is NOI divided by the rental property price. It calculates the property's potential return based on expected income and risks. The average capitalization rate can range from 4% to 10%. The higher the cap rate, the higher the risk.
Mortgage Payments
Knowing how much you need to pay every month is just as important as calculating how much rental income you can earn. Include all costs like principal, interest, property tax, and insurance to cover all your bases.
Rental Analysis FAQs
Are there tools I can use to conduct rental analysis?
- In addition to the GRM tool, Harland Property Management offers a free rental analysis tool on its website. Real estate investors often use this tool for data-driven research.
Who can I consult for market rent analysis?
- You can consult property owners, landlords, property managers, or other real estate industry experts for help.
Why is rental analysis important?
- Evaluating a property's viability helps you determine whether it will generate positive net cash flow and meet your investment goals.
How do we estimate vacancy rates for rental analysis?
- You can research local vacancy rates through property managers, online sources, and analyzing rental comps.
Are the metrics similar between residential and commercial real estate?
- The property analysis for the two types of property is similar, although the numbers will be vastly different. Operating costs and down payments, for instance, are more substantial for commercial properties.
Trusting a Property Management Company's Perspective
Having a property manager in your corner can benefit you in countless ways. Companies like Harland Property Management don't just collect monthly rent, maintain your property, and increase your annual income; we can also help before you even acquire a property.
Your investment journey doesn’t have to be complicated. With our guidance, you can find the best investment properties and help your rental business thrive. You won't have to worry about monthly expenses or high turnover rates, as we will do our best to maximize the value of your property.
You can start your investment journey as early as today! Contact us to discover how we can help you along the way.
