Real Estate Investing Basics

The 3-Step Process for Evaluating a Prospective Investment Property

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Business Management
32 Articles Written
evaluate-property

Today's real estate investing climate tends to make accurate and appropriate information critical for success. If you do not know your local housing market, you could be in trouble. An excellent strategy for developing expertise in your local market is by trailing a seasoned mentor who knows what he or she is doing. In addition to teaching you tips on how to analyze current market conditions, they will also help you understand what to look for in your local housing market.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Compared with other forms of investments, real estate investing incorporates a relatively favorable risk/reward profile, but with low liquidity (easy entry and exit). Let’s consider some of the most important factors for investing in real estate.

The 3-Step Process for Evaluating a Prospective Investment Property

Evaluate the Area

What to look for? You’ll want to seek a mid-to-long haul view about how the area is going to develop over the investment period. Today’s quiet open area at the back of a private building may be created into an uproarious manufacturing facility in the future, making the private valuations less beneficial. It is fitting to carefully check the ownership, type and expected utilization of neighboring zones, establishments and free land in the region.

multifamily-markets

Related: Newbies: Don’t Forget These 4 Areas When Evaluating Multi-Unit Deals

Evaluate the Property

Why is it important? To find real estate funding before purchasing, you need to properly evaluate your property. You can carry out a survey of the market with the help of your mentor.

What to look for? You need to make small reports to evaluate your property in a better way.

  • Sales Comparison Report: Recent comparable report of homes that have been sold or active in the market. These homes should have similar characteristics. For example, the same number of rooms or bathrooms or the same kind of kitchen.
  • Costs Report: What would be the expenses that the investment property would entail, including taxes, possible repair costs, and depreciation in the market? Whether you are buying a new property or rehabbing an old one, you need to calculate all these costs.
  • Income Report: Based on expected cash flows (monthly rent), you can create an income report that will show what kind of money and profits you’ll be making in the end.

real-estate-market-study

Related: Cap Rate: How to Best Evaluate & Interpret a Property’s Numbers

Evaluate the Profits

Before buying an investment property, you need to look for what kind of profits you’ll be making. Some of the things to look forward are:

  • Expected cash flow from rental income; inflation favors landlords for rental income
  • Expected increase in net asset value due to long-term price rise
  • Benefits of depreciation (and available tax benefits)
  • Cost-benefit analysis of renovation for sale at a better price gain
  • Cost-benefit analysis of mortgage loans versus value

Investing in real estate is a big decision. That’s why you need to ensure that you’ve taken all the possible steps to evaluate the pros and cons of the area and property you are investing in and figure out the profits.

How do you evaluate a deal?

Please share with us in the comments section below.

Mark Ainley is an investor, managing broker, and property manager with almost two decades of experience in real estate. Mark found his way into real estate by purchasing and flipping condominiums p...
Read more
    Douglas Skipworth Rental Property Investor from Memphis, TN
    Replied over 4 years ago
    Great article, Mark. It reminds me of what fellow BP’er Alex Craig always says, “You change the property (i.e., repairs), you change the tenant (i.e., re-rent), and you change the management company (i.e., replace), but you can’t change the area!”
    Mark Ainley Developer from Roselle, IL (Chicago Suburb)
    Replied over 4 years ago
    Correct. A lot of people leave out the external factors that we cannot control. In Chicago people forget the huge impact being next door to a multi family can be if you own the SFH next door.
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied over 4 years ago
    A ton of folks have questions about how to get started. Where to look? What type? How to know if its right? Thank you for streamlining and outlining key steps!
    Don Alberts from Frankfort, Illinois
    Replied over 4 years ago
    Mark thanks for your expertise in sharing this with us all. Have a great day. Don
    Marcellus P McKinley
    Replied over 1 year ago
    Great article Mark. Thanks for taking the time to write it!