6 Important Steps to Analyze Real Estate Properties Before Investing

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Analyze Real Estate Properties Before Investing

Are you looking to invest in property? Of course, the buyer wants to get a great deal on his investment. Although many reality programs are alluring the buyers with promising discounts and virtual tours from the comfort of home, analyzing the property is very essential for successful real estate investing.

There are so many metrics in real estate investment. Let’s get into the points regarding important steps to analyze real estate properties before investing.

1- Property Analysis 

6 Important Steps to Analyze Real Estate Properties Before Investing - Property Analysis

Important Steps to Analyze Real Estate Properties Before Investing #1: The foremost step in conducting a real estate marketing analysis is to do a property analysis.  It includes the following points:

  • Location and neighbourhood

You should look around and have a drive around the property to know about the neighbourhood of the property where it is located and to assess the quality. In those cases, where you look out-of-state property, then making use of online resources, say, Google Street View can help notice the streets. If you are going to use Google street view, it is a point to remember that there may be some out-of-date images. 

  • Get to know about the size or square footage details of the property
  • If you are looking to buy a house, then check for the number of rooms available with the property including other rooms.
  • For buying houses, the age of construction matters a lot. When it was built and remodelled it had impacts on the value of the property. 
  • Consider whether the property is located near a busy road and has quick freeway access. Make sure if it is close to essential access to stores, public transportation, hospitals, parks, and school.

2- Calculate the Capitalization Rate 

6 Important Steps to Analyze Real Estate Properties Before Investing - Calculate the Capitalization Rate 

Important Steps to Analyze Real Estate Properties Before Investing #2: One of the most common and important measures when it comes to a real estate property analysis calculating is its capitalization rate or “cap rate.” It is the rate of calculation of the potential annual rate of return, the gain or loss that you can get from the investment.

How to calculate the capitalization rate?

The basic formula often used to get into capitalization rate is:

   Capitalization Rate = Net Operating Income/ Current Fair Market Value

The major use of cap rate can be used in all types of real estate investment. With this capitalization formula and assessment, you consistently check across all deals that you get and compare them with each other, and get to know of the returns that will be offering you. By doing a capitalization rate assessment, you can be able to compare the available deals and come to a better decision of which is right to invest in and which is not to invest in.

3- Determine the value of the property

Important Steps to Analyze Real Estate Properties Before Investing #3: Appraising the worth of a property helps you in getting all those assessing benefits that will be derived in the long run by owning that piece of real estate. Typically, the estimation of the value includes all its social and economic trends and government regulations related to the specific real estate property. 

How do I find out the property value?

You can make use of online tools like Zillow Zestimates. This will help you in gaining an estimated market value of the property. However, remember, these market value estimates can’t be accurate. But you can use the gained insights as good info or starting numbers to continue doing the real estate market analysis.

4- Comparative Market Analysis

Important Steps to Analyze Real Estate Properties Before Investing #4: A Comparative Market Analysis indicates the estimation of the property value based on its recent sales by comparing it with other similar properties in the area. By conducting a comparative market analysis, you can be able to determine the worth of the property.

Conducting a CMA – critical factors included:

Every property will have different features.  While you perform a CMA, it will get into the walk-through of the property in all terms and take into consideration the essential factors affecting the condition of the property.

  • Average rate per square feet in the specific area
  • Recent rate prices of similar properties
  • Comparative prices of other similar properties on the market

5- Find out the fair market value

6 Important Steps to Analyze Real Estate Properties Before Investing - Find out the fair market value

Important Steps to Analyze Real Estate Properties Before Investing #5: Fair market value is the price for which the property will be sold, on the open market. This is the price range that both the buyers and sellers familiarized with the relevant facts about the property will agree upon and accept the deal, assuming it is done without any pressurization.

How to assess fair market value?

There are some basic methods to find out the fair market value.

Evaluating the cost or selling price – If the property has been recently bought or sold, it shows that it has a good fair market value.

Sales of comparable assets – By having an assessment of a list of recent sales prices for similar other properties, referred to as comparable, is also a way of determining fair market value.

Replacement cost. –  This is something related to settling an insurance claim and preparing for a tax return. This indicates the cost to which the property can be bought or sold.

Seeking the advice of an expert – By availing the services of a professional appraiser, you can get the value of that piece of property.

6- Determining the cash flows and profit opportunities from the property

Important Steps to Analyze Real Estate Properties Before Investing #6: Since real estate property is a private asset, you can’t expect the same daily visibility in terms of pricing and performance, just like you can assess for bonds or stocks. Calculating the expected return from the property requires some effort to be invested. Here one of the general methods to calculate the real estate property investment’s profitability is calculating its Internal Rate of Return (IRR).

What is the Internal Rate of Return (IRR)?

The metric Internal Rate of Return (IRR) gives the details of the average annual return to the investors, which they can either realize or be able to expect from the real estate property or investment over some time, this is expressed as a percentage. The mathematical formula for calculating IRR involves finding the discount or interest rate, which will set all the cash flows of the project to an NPV of zero.

Bottom line:

We hope the above steps in this guide (6 Important Steps to Analyze Real Estate Properties Before Investing) will help the investors in making better decisions related to buying and selling properties. If you want to invest in real estate, do not hesitate to give us a shout to show you the best profitable options. – Reza Abbaszadeh

About the author

Abbaszadeh Team

Mr. Abbaszadeh is the founder and CEO of Abbaszadeh Entreprises consists of 4 different companies and multiple divisions within its venture portfolio. In 2019, Reza Abbaszadeh has been awarded as The Youngest Iranian Businessman by Forbes Magazine.