An investment property analysis gives real estate investors a basis for setting rent schedules, estimating income and operating expenses, and provides a detailed description of the rental property’s physical layout and marketplace position.
Fair enough. So let’s take a look at five questions that an investment property analysis should consider and address before an investor makes a real estate investing decision to purchase.
1) Where Does the Property Fit in the Market?
This is a fairly straightforward assessment where you would consider how the property is currently being used and then compare it with other similar-type properties in the local market. If the subject is a multifamily apartment building, for example, then you would want to know how it compares to other multifamily apartment buildings. Is it just as good, inferior, or maybe heads and shoulders above good (whether in its current condition or with minimal alterations)?
2) What Do You Expect of the Property for the Time You Plan to Hold It?
This concerns your investment objectives and the period of time that you expect to hold the investment. Whereas some real estate investors, for example, might simply want to add value by increasing the rents and then re-selling for a profit immediately, others might have their sights on retirement and are looking for long-term ownership as a means to generate future supplementary income.
3) What are the Physical and Economic Characteristics of the Property?
This concerns the type of rental agreements already in force that might impede or inhibit you from making substantial improvements to the property. Whereas month-to-month rental agreements might not feel as financially secure as longer term agreements, for example, at the same time they offer you an opportunity improve the space when they become vacant and seek out tenants willing to pay higher rents perhaps on longer term leases. Likewise, when long term leases are already in effect, you get some amount of financial security but essentially cannot as readily make improvements that might warrant higher rents and perhaps add value to the investment property.
4) How Does the Property Compare to the Competition?
In this case you are comparing the location, age and type of construction, condition, size of units, and amenities and features with an eye upon specific differences. Does the subject investment property stack up well against other properties, or not so well? Along these same lines, could minor changes to, say, property management, for instance, improve the property’s position in the market? Or are their issues like location, for example, that are unchangeable and will continually present challenges for you to keep the units occupied at market rents?
5) What are the Operating Expenses?
This, of course, is vital for you know when real estate investing because operating expenses directly affects cash flow and profitability. In this case, you want to be sure to include those expenditures that keep the property in operation such as cost of utilities and trash, repairs and maintenance, advertising expenses, licenses and fees, and so on. But equally important is to be sure you use realistic numbers for your investment property analysis projections. Whereas the current owner might indicate an operating expense ratio of 40%, for example, you might discover upon closer examination that the operating expense ratio would be more realistic at 44%.
