Analyzing an Income Property: How to Make the Right Choice
Owning investment property is risky yet rewarding. There’s a reason why it’s high on the list for America’s favorite investments. When done properly, it can bring excellent returns while you own an asset that is increasing in value. But it all starts with analyzing an income property and making the right choice.
Proper analysis is crucial. With a steady, strategic approach, you’ll find the right property for your future prosperity.
Simple Steps for Analyzing an Income Property
Research the Location
Of all the factors that impact the profitability of a property, few are as important as the location. In fact, one could argue that this is the most important factor, as a low-quality (but safe, of course) home in a neighborhood conducive to renting is more likely to bring a profit than a top-flight home in a neighborhood where you can’t find renters.
To start this step, you should perform a real estate market analysis, which will help you discover the various trends impacting an area. During this market analysis, research job creation and stability in the area, and see if the regional and local economy is diverse and growing. Population growth is also an important factor; a growing population is more likely to bring high-paying renters.
You’ll then want to narrow your focus to the neighborhood. See if there are people renting in the area, how much homes are bringing, and talk with local landlords to see if this area is profitable.
Complete an Income Analysis
If the area checks out and appears to have the potential for reliable renters, the next step is to analyze the specific property. You’ll want to estimate how much money you can bring every month from your potential purchase, and a profession review of the home can help. Analyze the property next to similar properties in the area and you’ll have a fair estimate for how much you can earn on a monthly basis.
You’ll also need to estimate the costs. The costs of purchasing and owning the home can vary, but they will include the total price, a downpayment, mortgage payments, repairs, maintenance, and more.
Compare the Property to its Neighbors
Finally, you want to compare the property’s price to home prices in the region. As an investor, it’s important that you get a good deal on the property. While people are often willing to pay above market for their dream home, you can’t afford to overpay when it comes buying a property; it’s a business decision, not an emotional one.
Compare the property to similar for-sale homes in the area, and be be sure that the price is fair. It’s usually not good to have the most expensive home in the neighborhood; this is especially true for investment properties.
Analyzing Different Property Types
When you start searching for investment options, you’ll discover that properties come in a variety of types, and while the basics are the same, there are specifics you should consider for for each category.
“Comparables,” which are properties comparable to the one you are considering, often determine the value of a single-family home, and they should be a crucial part of your investment consideration. Comparables share similar floor plans, number of bedrooms (give or take one or two), and have garages that are roughly the same square footage. They also have similar amenities, such as outdoor decks, pools, fireplaces, or other unique home feature.
Using comparables is an important part of choosing a single-family home for your investment purchase. Try to find homes listed on the market that are similar in value and structure, and use their listed price as a way to gauge your purchase.
Single family homes can be more difficult, and a little more complex, because you are often in competition with typical homebuyers. People seeking a home for their family often pull single-family homes into bidding wars, and they are emotionally motivated to pay higher prices for properties. As an investor, you have to take a clear approach to investing, and your purchase decision must be motivated by the simple money factor, not by emotions.
If a home has multiple units, such as a duplex or a four-plex, the evaluation process is a little different. In this case, you need to focus on how much income and profit you will be able to generate, as comparable may not exist.
For these properties, a real estate analysis is especially important. This analysis should consider cash flow and expenses. You need to know how much you can bring in from each unit, then use this information against the total expenses that will come from ownership.
Appreciation is also important, but multi-unit properties don’t always appreciate in the same way. For single-family homes, if most properties in the neighborhood are increasing in value, it’s a safe bet that your individual property is increasing as well. However, a multi-unit property may not gain or decline in value on a consistent level with multi-unit homes.
Where Can You Find All of this Information?
We’ve been talking a lot about the various data points and information you need to make your purchase. But where can you find the required information for analyzing an income property? Good financial decisions involve as much useful information as possible, and much of the information you need can be found from these sources.
- Property Listing: This real estate listing will provide the foundational information you need, including number of units, square footage, asking price, number of rooms, and parking.
- Lender: You need to understand what types of loans you can use to purchase the property, and how much you should expect for payments. Talk with a lending agent to secure this information.
- Seller: If the property was rented in the past, the current owner should be able to provide information on previous rent checks. Use this source for data on the amount of monthly payments, vacancy rates, expenses, and taxes.
With these sources, you can expect to find much of the required information for your purchase. It may not provide everything you need, but it’s a good start for your future decision.
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