A good analysis of investment property gives the real estate investor (or property management firm operating on behalf of the investor) a basis for setting rents and estimating income and expenses.

It is important, therefore, that an investment property analysis consider the following five questions.

Where does the property fit in the market?

Assess how the income property is currently being used and compare it to similar income properties in that market segment.

What do you expect from the property during your holding period?

This concerns your investment objectives and period of time you plan to keep the property. For example, whereas you may be interested only in raising the rental rates to competitive market rates and then selling the property, perhaps your goal is to create a steady flow of income for your retirement with the intent to someday hand it over to the next generation.

What are the physical and economic characteristics of the property?

If the units are leased (as they typically are with commercial real estate), it is important to determine the duration of the leases. Whereas, existing leases of short duration may hamper or prevent you from making substantial property improvements, alternatively, this may be viewed as an opportunity to renovate and improve the quality of space and seek out new tenants at higher rental rates on longer term leases.

How do the rents for the subject property compare to the competition?

Market derived rents are a function of market-driven conditions and contract negotiations. Based on location, age and type of construction, size of units, and features and amenities found in the market, how does the property stack up to similar rental property? Is there reason to think they can be improved with better management or negotiation, or do they appear too high to believe you can replace the current owner and maintain them?

What are the operating expenses?

Estimating future operating expenses requires a close examination of previous operating statements and then creating your own pro forma income statement based on your estimation of future expenses.