Every real estate investor willing to make money from real estate investing has heard of real estate property market analysis. Although conducting real estate property market analysis sounds like a difficult task, real estate investors can actually do it themselves. Of course, this requires having the right knowledge and guidance throughout the research process. Luckily, you have come to the right place! Mashvisor can provide you with everything you need to know about this real estate market analysis. Additionally, the real estate blogs on the platform reveal useful tips and the necessary steps for conducting such analysis.
What Is Real Estate Market Property Analysis?
Real estate market analysis, or the so called comparative market analysis (CMA), is an evaluation of the current market values of similar, recently sold investment properties. These similar properties are real estate comps. Real estate comps are used to determine the market value of a real estate property with comparable characteristics. When conducting comparative market analysis, real estate investors should choose real estate comps that are within 3 miles distance from their property and have been sold before 3 to 6 months. It is advisable to study as many real estate comps as possible in order to get more accurate results. It is important to note that such establishment of the market value of a property is not an appraisal. Thus, it has no legal or financial value.
Real estate property market analysis aims to help real estate investors not in search of the best real estate markets, but rather of the best real estate investments. As you can probably guess, finding the best real estate investments in a chosen area is not a simple task. Nevertheless, real estate property market analysis can help you tons. This is due to the fact that through understanding the local housing market, real estate investors can make the best choice for their investment business. It is safe to say that the best way to make money from real estate investing is analyzing the local housing market and the investment properties first.
Related: How Do You Conduct Residential Property Market Analysis?
What Is Real Estate Property Market Analysis Useful for?
So far so good, but you may ask yourself the question: “What is real estate property market analysis useful for?” Well, there are three major benefits of this type of real estate analysis:
#1 Deciding on a Listing Property Price
Choosing the listing property price of an investment can be challenging for every real estate investor. However, conducting comparative market analysis makes it easier to understand the current real estate market situation and make the best decision. Remember that the correctly set property price can only bring benefits to your real estate investing business.
#2 Choosing the Appropriate Monthly Rent
In order to make money from real estate investing, the landlord of a property should set up the right monthly rent. By conducting real estate property market analysis, therefore, figuring out the market value of your investment, it is easier to choose how much to charge for rent. The rent usually varies between 0.8% and 1.1% of the value of a real estate property.
#3 Selecting the Best Real Estate Investments
Last but not least, real estate property market analysis is useful when trying to find the best real estate markets and invest in the right real estate property. This is so because the analysis provides you with an overview of the current situation in the field of real estate. Additionally, by knowing the market value of similar properties to the one you want to invest in, you will know the actual worth of the investment. This will help you in closing the best deals and avoiding overpaying.
It is necessary to note that current listings are not absolutely accurate as their value is an estimation itself. Current listings can be influenced by many factors such as the present condition of the real estate market, whether it’s a buyer’s market or a seller’s market. It is, hence, advisable to only take recently sold properties in your comparative market analysis.
Related: Real Estate Market Analysis: The Basics
What Types of Real Estate Property Market Analysis Are There?
There are two types of real estate property market analysis. These are, namely:
#1 Quantitative Real Estate Property Market Analysis
Quantitative real estate property market analysis is the one using real estate metrics. Therefore, it mainly deals with numbers and calculations. There are three main real estate metrics in this type of research:
- Cash on cash return
Cash on cash return is used as an indication of whether or not an investment in a real estate property would be a good idea. The cash on cash return calculates the earned cash income over the cash invested in the property. The formula for calculating cash on cash return is as follows:
Cash on Cash Return= Net Operating Income/Total Cash Investment
- Cap rate
Cap rate, or capitalization rate, is another one of the real estate metrics. The cap rate estimates the investor’s potential return. It calculates the rate of return of a real estate property on the basis of the rental income the investment is expected to generate. The formula for calculating this metric is:
Cap Rate= Net Operating Income/Current Market Value of the Real Estate Property
- Cash flow
The cash flow simply represents the money which inflow and outflow during a certain period of time, thus the profit or loss the real estate investor is making. Real estate investors opt for positive cash flow: the money which inflow is higher than the money that outflows. It is pretty easy to calculate the cash flow of an investment property:
Cash Flow= Inflow Money (Monthly Rental Income) – Outflow Money (Expenses, Mortgage Payments, Taxes, Etc.)
#2 Qualitative Real Estate Property Market Analysis
The qualitative real estate property market analysis refers more to the features of the investment property. Some of these characteristics are:
- The neighborhood of the real estate property
- The square footage of the investment property
- The number of bathrooms and bedrooms that the real estate investment has
- The age of the real estate property
- Additional features of the investment such as a garden, a pool, etc.
Are you interested in finding the best real estate markets as well as the best real estate investments? Use Mashvisor’s investment property calculator to help you in conducting real estate property market analysis with an ease.
Related: Mashvisor’s Investment Property Calculator: Real Estate Investing Made Easier