A REIA is a process of evaluating real estate investment possibilities to determine whether they will provide the profits necessary to meet your investment objectives. Analyzing a real estate property includes the steps listed below, which include calculating:
- the property’s market value
- operational expenses
- market rental rates
- the rate of return on your investment
Gathering your information
A sound financial analysis entails entering a large amount of data into your investment model and using the model’s projections to decide whether an investment is good. For the most comprehensive financial analysis of a real estate property, familiarize yourself with the following variables:
- Details on the property: This will typically include the number of units, the square footage, and the utility metering arrangement
- Total acquisition expenses: This is the list price + rehabilitation or repair charges
- Financing specifics: Data on a loan or mortgage, for example, the total loan amount, the downpayment, the rates of interest, and any closing fees
- Income: For example, rental revenues and any other revenue generated by the property
- Expenditures: for example, property taxes, insurance premiums, and upkeep.
Doing a real estate property analysis: Metrics analysis
Examine important metrics after you’ve gathered all the information to see if your property investment will end up being a successful investment for you. Consider using any of these real estate indicators:
NOI (Net operating income)
The Net Operating Income is a metric used to calculate a property’s revenue after deducting operating expenses. While NOI does not offer a complete picture of a property’s viability, it does serve as the basis for some additional computations you may need to do in your further analysis.
Net operating income is calculated using the following formula:
NOI=sum of rental income + other revenues – operational expenses.
While renters will most likely provide the bulk of your revenue, you should also count any additional revenue sources, such as parking fees or money from laundry facilities.
You should include maintenance and repairs, utilities, and any other usual outlay in the operating expenses in your calculations. Mortgage payments, on the other hand, should not be considered. Net operating income does not include debt service.
A word on “maintenance and vacancy”: An astute investor incorporates “rental vacancy” and “maintenance expenses” estimations in their property analysis. This includes a freshly built or fully refurbished turn-key property with tenants at the time of closing. It’s because if you maintain a property for a long time, tenant turnover, vacancies, and repairs will eventually occur, all of which may cost you a lot of money and affect your cash flow.
Perhaps your property will be full for four years with no vacancies, but then the renter will leave, rendering your property idle and without income for, for example, six months until a new tenant arrives. Or maybe you go a long time without needing repairs, but then you need an expensive one. If you plan for all of this ahead of time and distribute the costs properly, you will not be shocked when it occurs.
COCR (Cash-on-cash return)
After calculating your NOI, compute your COCR. To do so, divide your NOI by the acquisition price of the property. Your first investment estimate should include closing expenses, as well as the cost of any required repairs.
The cash-on-cash return represents your ROI (return on investment) in proportion to the amount of money invested.
Capitalization rate (cap rate)
You can compute the capitalization rate (often called the cap rate) by dividing your NOI by the property value. A high capitalization rate indicates a higher degree of risk as well as a greater chance of profit. As a result, there is no optimum cap rate to strive towards; it depends on prevailing circumstances. Every property investor must decide on their own where their level of comfort lies.
You may use the cap rate to compare multiple properties to see which one is expected to perform better in the long run. Alternatively, assuming you know the market capitalization rate in your area, you may use this formula to evaluate how your investment stacks up against your competitors.
Conclusion
Generally, no two real estate investors will ever perform a real estate market analysis in the same manner. However, the above discussion is a good starting point for any future investment decisions. With this information, you should make an informed judgment about whether any property under consideration is a good investment.
