This series of articles aims to explain the different aspects of investment analysis in real estate investing, which include investment property analysis, comparative market analysis, and the property valuation methods, while also explaining the different aspects of each and the tools used to conduct investment analysis with ease and at high efficiency.
- What Is Investment Analysis?
- What Is Investment Property Analysis?
- What Are the Different Property Valuation Methods?
What Is Investment Property Analysis in Real Estate Investing?
In real estate investing, investment property analysis is a process of analyzing a potential real estate investment property to determine its viability for investing based on values and calculations related to the estimated profitability of the property and the different aspects that affect its performance.
When it comes to investment property analysis, a real estate investor needs to take several aspects into consideration depending on his/her investment strategy, the type of real estate property that he/she is investing in, and the final goal that he/she intends to achieve through his/her investment.
Since the investment property analysis tends to help the real estate investor identify the different factors that may affect the performance of an investment property and/or affect its profitability, a real estate investor has to make certain decisions that can either help him/her control these factors or control their effects on the investment property.
While some of these factors may not be controllable by the investor, as we will discover shortly, the investor needs to make sure that his/her choices are compatible with one another in order to avoid any complications or to prevent certain aspects from unexpectedly affecting the performance of an investment property.
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Location
As with any real estate investment analysis, investment property analysis should also take into consideration the location of the investment property and build around it.
In real estate investing, location is everything.
You will hear this numerous times when reading blogs, guides, and books about real estate. But the location of an investment property can indeed affect its performance and determine its future well before any investment property analysis even takes place.
We usually like to illustrate this through examples related to rental properties in particular. This is because A) rental properties are probably the most popular type of real estate properties, and B) because rental properties are affected by seasonal effects the most, and seasonal effects are tightly related to the location of the property.
So, in a hypothetical situation where a real estate investor is looking to conduct investment property analysis for a property that he/she intends to purchase and rent out traditionally, the entire investment property analysis should be based on the location of the property.
Not only will the location of the property determine the market in which it exists, but it is also necessary to conduct market analysis, which is another aspect of investment analysis that is as important as the investment property analysis. However, the location of a rental property, in particular, will heavily affect its occupancy rate, as well as its potential for appreciation in the future.
The occupancy rate and the appreciation potential of a real estate investment property are crucial aspects when it comes to investment property analysis, as they can directly affect your rental income and the profit that the property makes.
Investment Property Analysis: Real Estate Investing
Note: Click Here to Start Searching for Investment Properties in the Best Performing Locations in the US!
Related: Finding an Investment Property: Traditional vs. Mashvisor
About Appreciation
When doing investment property analysis, it is typically advised to not use appreciation as a determining factor in your analysis due to appreciation being difficult to predict.
It is commonly said that in real estate investing, appreciation is the icing on the cake.
This, however, doesn’t mean that you shouldn’t seek appreciation when possible.
The appreciation of an investment property is tightly related to its location. When doing investment property analysis, it is important to research the area and look for any signs of future developments which may lead to an increase in the value of the properties that are in it.
These signs could be anything such as plans to build new train stations, new shopping centers, a new hospital, or a growing population or workforce.
Some of these signs can be easily noticed, and they could almost guarantee that an investment property will appreciate in the future, in which case it wouldn’t hurt to include this value in your investment property analysis.
A property which shows slightly lower potential for profits, but a higher potential for appreciation might be worth far more than a property with no potential for appreciation at all.
Seasonality and Occupancy Rate
If you’re conducting investment property analysis for a rental property, then the occupancy rate should be one of the aspects that you focus on.
The occupancy rate of a rental property is the percentage of time throughout the year that this property is expected to be occupied by tenants and therefore generating a profit.
The occupancy rate is directly affected by the location and the seasonality of that location.
For example, a vacation rental home near the Miami Beach area might be a great choice when it comes to occupancy rate due to the area’s attraction throughout the year, including the winter. In other, colder areas, a rental property might lose a high percentage of its occupancy rate during the winter, which directly affects the rental income that it generates.
Note: Click Here to Start Searching for Investment Properties Based on Their Occupancy Rate!
Property Valuation Methods
In addition to the more general aspects of investment property analysis, which are mostly related to the property’s location, there are certain property valuation methods that will determine an investment property’s profitability and viability for an investment based on more controllable and accurate metrics that directly indicate the estimated profits that the property will make.
These property valuation methods are used in both stages of investment analysis: the investment property analysis and the market analysis.
Investment Property Analysis: Real Estate Investing
The most common property valuation methods are the ones that have to do with an investment property’s return on investment, which can be determined using certain calculations and metrics in order to analyze an investment property.
Learn More: Property Valuation Methods: Real Estate Investing
Cap Rate
One of the most common metrics used to determine a property’s return on investment – the cap rate – is a value in investment analysis which identifies the return on investment of a real estate property based on the current value of the property.
The cap rate is typically expressed as a percentage which represents the amount of profit that the property makes in relation to the current value of that property.
Cap Rate = NOI (Net Operating Income)/Current Market Value
Additionally, as will be explained further in the article on property valuation, the cap rate of an investment property can also be used to determine the rate of risk that the investment has.
Generally, higher cap rates are associated with higher return on investment as well as a higher rate of risk. A real estate investor would have to decide on the balance that he/she desires between the profitability of an investment property and its return on investment or cap rate.
Learn More: Cap Rate Property Valuation: Real Estate Investing
Related: How Mashvisor Revolutionized Cap Rate and Investment Property Analysis
Cash on Cash Return
The cash on cash return is a very similar metric to the cap rate, and it is also used in investment property analysis to determine the return on investment of the property.
However, unlike cap rate, the cash on cash return is used to determine the property’s value based on the amount of cash which the investor has paid for the property.
This amount does not include any borrowed money through a mortgage or a loan, and will only take into consideration the amount of cash that the real estate investor used from his/her own money.
Cash on Cash Return = NOI (Net Operating Income)/Cash Invested
The cash on cash return metric can be trickier to use in investment property analysis or a property valuation process.
This is because the increase of a property’s value over time is not taken into consideration in relation to the cash invested in the property at the moment of its purchase.
We will be discussing the cash on cash return as well as the cap rate metrics in more detail in the property valuation article, as well as in articles that explain how these values are calculated.
Learn More: Cash on Cash Return: Real Estate Investing
Bottom Line
Investment property analysis is an inseparable part of investment analysis.
When combined, both the investment property analysis and the market analysis are taken into consideration to conduct overall investment analysis and determine the viability of an investment.
Related: What You Must Know About Real Estate Investment Analysis
And while this article only covered the general points related to investment property analysis in order to determine the viability of a single investment property or a few potential properties, the methods of property valuation and the metrics used in it will be discussed more thoroughly in a separate article.
If you’re looking to find investment properties with readily available investment property analysis, and in markets with readily available market analysis, head over to Mashvisor and start exploring the properties in the area of your choice!
With the data we provide, instead of spending months on research, your investment analysis will only take a few minutes to finish and help you make the best investment decision.