Analyzing deals correctly is the key in becoming a successful real estate investor. Learning to analyze deals takes a lot of practice. Even if you are not ready to invest yet, I still suggest you practice analyzing different deals on the market so when the time comes to analyze a deal that you are buying you will be ready.
First, you will want to look at the property itself.
- What year was it built?
- How many bedrooms and baths and is there an opportunity to add more?
- What is the price? Could you possibly get the property for less? Has it been on the market for a while?
- What is the property zoned for?
- What condition is the property in?
- Are there any major issues with the property?
- Can you add value to the property? If so, what would the estimated price of the property be after the improvements?
Next, you will look at the loan you will need to buy it. If you have a lender you work with, they will answer these questions for you. If you do not have a lender, free websites will give you estimated numbers.
- What type of loan can you get?
- What will the mortgage be?
- What will the Interest rate be?
- How much are Insurance and taxes if not included in your mortgage?
Income
Next, you will want to look at the income on the property. Sometimes the current income is on the listing and you can use that income for your numbers. If you feel like the property can rent for more or if you are unsure how much the property would rent you can always look on Zillow. Look at similar houses in the same area and use that as a guide for how much you can rent the property for.
Rental income is not always the only sources of income. Other sources may include:
- Washer/dryer income
- Utility fee
- Pet fee
- Garage rent
- Storage rent
Expenses happen whether you want them or not, and you need to plan for that when analyzing deals.
Here are some typical expenses you will want to look out for:
- Will you use a property management company? That will usually be 6-10% of your gross rental income.
- Will you have a maintenance guy, yard maintenance, snow maintenance, etc? How much will this cost each month?
- How much will utilities be each month? Are you going to cover these or charge the tenants a fee for them?
- Lastly, set aside 10% of your income for vacancy, repairs, and capital expenditures.
You want to account for any major repairs, you will need to fix after buying the property.
- Are there major repairs required?
- If so, what is required, and approximately how much will it cost?
Cash flow
- You will subtract your total expenses, mortgage, taxes, and insurance from your total monthly income to find your cash flow. (major repairs will be calculated in the Cash on Cash ROI) Positive cash flow is ideal, but if you think the property will cash flow after 1 or 2 years and have the cash reserves, it may still be a good option.
Cap rate
- To find your cap rate, you will take the total gross income for the year and divide that by the property price. Properties 6-12% are generally good cap rates, and anything higher will be great.
Cash on Cash Return on Investment
- For the cash-on-cash ROI, you will take your NET yearly income and divide that by the total of your down payment and major repair costs. 12-20% ROI is generally really good. Anything higher is great.
Improvement value
- If you are making improvements or your goal is to fix and flip, you should look at the property’s value after you are done. What is the estimated new value of the property after renovations? What is your net income after selling? Take your gross income (equity gained in sale and any other rental income earned while owned) and subtract it from your total expenses (expenses, mortgage, insurance, taxes, major repairs, realtor fees, and any other costs).
