How to Perform a Basic Real Estate Market Analysis

March 22, 2024

You’re looking for homes to invest in but you’re not quite sure if they’re as good as you think so it’s time to perform a basic real estate market analysis on the home. The answer you’re looking for is whether these potential investments can stand up to the scrutiny of your analysis. 

There are many factors to consider when analyzing a property. You might go as granular with details like the economic, employment, and educational health of the area. Learning what these are and whether they align with your own personal and financial goals is going to be important in evaluating investments. Before we really dig deep into this, learning some basic formulas to determine if a property is worth investing in will be valuable.

You’ll learn the following formulas: 

• Cash-on-cash return
• Price-to-rent ratio
• Gross rental yield
• Capitalization rate (Cap rate)

Get data to run a basic real estate market analysis

A market analysis should be objective and unbiased, meaning it should be focused on the facts. You may get some subjective opinions from professionals, but balancing it out with real data will allow you to make better decisions on what types of investments are worth your time. Your analysis can pull data from the following sources:

• Local Facebook groups and media
• Local real estate organizations and agents
• U.S. Census Bureau
• U.S. Department of Labor
• The Federal Housing Finance Agency
• FHFA House Price Index
• Local county registers of deeds and tax assessors offices
• Online listing services like, Redfin, Zillow, Trulia and Craigslist

Breaking down the formula

Before running the analysis, there are some terminologies you should be familiar with first. From there, you can adequately analyze your potential investment property. 

Days on market (DOM)

This speaks to the average number of days a property is listed before it is sold. 

Rental price

If you haven’t already, you should look at what the rental costs are for comparable homes. Usually, a good guideline is charging rent between 0.8%-1.1% of a home’s value. For lower priced homes, say in the $100,000s, you will want to go towards the lower end, while in more affluent cities, you can go towards the higher end of that percentage. 

Beyond comparable properties, you need to also consider the following before determining how much rent your investment property can generate:

• Costs for repairs, maintenance, taxes, insurance and other fees (Such as property management if you’re outsourcing)
• Account for extra amenities that will justify higher rent. Recreational areas, add-on amenities, washer and dryer, etc. 
• Understand local economic conditions. For example, if your investment property gets an influx of tourists in the summer and you find that rentals increase their price during that time, you may want to consider doing the same

Additionally, you’ll want to research local laws that regulate rent. Several states and cities have rent control laws, so it’ll be important to know this for when you do your analysis.

Cash-on-cash (COC) return

This allows you to compare annual cash income (projected or actual) against the cash you’ve invested. This analysis doesn’t look at total return but rather only cash. 

To get your COC Return, you’ll need to divide annual pre-tax cash flow by cash invested. 

For example, imagine you bought a home for $300,000 with a $270,000 mortgage and sell after 1 year for $330,000:

First-year cash expenses

• Down payment: $30,000
• Closing costs, insurance and maintenance: $3,000
• Loan payments: $3,000, including $500 to principal

Total Expense: $36,500

First year cash inflow

• Sale price minus mortgage payment: $63,000

Total inflow: $63,000

Cash flow: $26,500 ($63,000 – $36,500)

Cash-on-cash return: 72.6% ($26,500 / $$36,500)

Price-to-rent ratio

Price-to-rent ratio compares the median house price and the median rent to determine the potential profitability of an investment home. 

Divide the purchase price by the total annual rent for an individual home. Generally, the rule of thumb is that the investment is profitable if the ratio is less than 15. 

Gross rental yield

For a single property, you will want to divide the annual rent by the total property costs. This will include the purchase price, closing and any renovation costs. Multiply it by 100 to get a percentage. Use this information to compare homes. 

Capitalization rate (Cap rate)

Similar to gross rental yield, cap rate uses net income to determine your rate of return. 

Divide your net operating income (Including management fees, upkeep, and property taxes) by the property asset value to get a percentage value. 

A low cap rate will mean there is higher potential for return with lower risk. You can determine this by comparing other properties to one another. Generally, there isn’t a rule for what the cap rate should be, but rather how it compares to other investments.

Property taxes

High property taxes doesn’t mean bad investments. You’ll have to do a real analysis of the situation to determine whether an investment is viable. Some communities with high property taxes can mean high-quality and in-demand neighborhoods that will attract long-term tenants. A good analysis will enable you to balance risks with rewards. 

If you do not know the estimated property tax figures, you can ask your agent or go to the local tax assessment office. 

It’s important to understand whether taxes will increase in the future. This will allow you to forecast and determine if you can set competitive rental prices with any possible future increases. 

Is your head hurting yet? If it isn’t I recommend that you apply what you’ve learned so far to see if any of your potential investments can withstand the scrutiny of your analysis. Stay tuned, we will have more information on deeper analysis.

Last week’s news

How to Tell if a Seller Is Motivated

A key factor in becoming a six-figure earning real estate investor quickly is to learn how to tell if a seller is motivated. A motivated seller is going to be much more likely to work with a real estate investor than someone without a timeline. 

A motivated seller is someone who has something that is requiring them to sell their home quickly. This can include a pending foreclosure, job loss, divorce, a death in the family, or a variety of other things. However, they aren’t just going to come right out and tell you they need to sell quickly. 

I like to remind my students that you can’t say the right thing to the wrong person. When a seller isn’t motivated, they will not work with you no matter what you say. On the flip side, you can’t say the wrong thing to the right person. Motivated sellers will be open to you when you have a solution to offer and they will be ready to sign on the dotted line.

Questions to Ask to Gauge a Seller’s Motivation Level 

You can understand how motivated a seller is by asking them specific questions. Try and put the questions into a natural conversation, and not like you are just reading a list of questions. The more comfortable they are, the more likely they are to be forthcoming with honest answers.

• Why are you selling?
• How long have you lived here? 
• Have you had the house on the market before? 
• Is the house on the market now? 
• Do you have a new house already? 
• How far away are you moving?

And remember, them sharing their pain points is what can help you in the negotiation phase. Be empathetic and show them that you really are there to help them.

Signs a Seller is Not Motivated

Sometimes it will be easy to tell if a seller isn’t motivated. They might just come out and say, “I don’t need to sell my home for another two years, but am looking at options now to get prepared.” Nope. They will not be your deal. 

A seller who is not motivated will nitpick everything you say and will have objections for everything. A motivated seller can also have objections, but if they aren’t motivated nothing you can say will change their mind. 

Actions speak louder than words. I can’t tell you how many students say to me, “Oh man, they’re really motivated. They really need to sell. They need to move in two weeks. They’re super motivated! But, the house is only worth $250k and they want $275k, all cash. They aren’t willing to budge. But they’re really motivated.

I say, no way they’re not motivated! How can you tell?  Because they want more than what the house is worth and aren’t willing to negotiate. They also want all cash. Now, if the house is worth $250k and they’re saying, “Hey, if you can give us $200,000, we’re out of here.” That’s motivated! 

Identifying motivated sellers is one of the major keys to success in the real estate investing world and so it is something you need to learn.

 For March 29, 2024

Short Term Investing versus Long Term Investing

Before we can answer what’s better – short term real estate investing versus long term real estate investing – we have to define what each strategy looks like. Once you understand each strategy, you can determine which strategy is best suited for you. 

You’ll learn the following strategies: 

• Wholesaling
• Fix and Flip
• Buy and Hold

What strategies are involved in short term real estate investing?

Short term investing, as its name suggests is investing for the short term. The goal is often to flip a property for a certain amount of profit within a short period of time. Wholesaling and fix and flips are usually the method of investing for the short term.

What is wholesaling?

Wholesaling is a strategy that is very attractive to many new investors. You don’t need to have any capital of your own, you just need to put in sweat equity into your business. This is an easy way for you to get started. Many people start off wholesaling to get a taste of what real estate investing is like and if it’s something they enjoy.

What is fix and flip?

Fix and flips is an investing strategy that will require financial resources. If you don’t have the financial resources to buy and flip properties, you can always borrow money through private or hard money lenders. This makes sense if you do the math right. 

What strategies are involved in long term real estate investing?

Inversely, long term investing is investing for a long period of time. Investors will usually keep their properties so that they can earn passive income while the investment appreciates and earns more equity. This is often associated with buy and hold strategies, with the goal of renting.

What is a buy and hold strategy?

Buy and hold strategy is where you purchase a home and you hold it for a long period of time. This is where you can have more opportunities to make money on a real estate investment. This strategy allows you to create passive income, in the form of rent. After some time, equity will have been built and you can sell to make more profits, if the housing market has been kind to you. 

The biggest misconception is that investors think that in order to employ this strategy, they will need a lot of money and good credit, fortunately this is not true. You can purchase homes with as little as 1% down and in some cases do not need to run your credit.

Short term or long term investing?

This is going to be a personal decision. What works for someone else may not necessarily work for you and your unique circumstances. Keep learning, find a coach, and maybe after some experience, you’ll find a good mix of what will work for you.

Thank you for visiting my Weekly News site. To make sure you stay up to date, please confirm or change your email. Thank you — Marko

4-19-2024

Subject-to Real Estate Investing With No Cash

In one of the hallmark investing methods I teach, subject-to investing, you can close deals with little risk and none of your own money or credit. It is a common misconception about real estate investing that you need cash to get started.

When I started in real estate investing, I had no cash to my name. I had no credit. My credit wasn’t just bad, it was nonexistent. I pushed forward and developed a system to invest in real estate with little risk and no cash or credit. 

What is A Subject-to Real Estate Investment

This type of investment is buying a home subject-to the existing loan held by the seller. Using the subject-to investment method can be very lucrative without using your own cash. This method works well if you have poor or no credit. 

The process usually goes like this:

1. The homeowner qualifies for a mortgage through a lender. 
2. For whatever reason, the homeowner becomes a motivated seller. Maybe they can’t afford the monthly payments, or need to move in a hurry. 
3. You step in and offer to take over the payments. 
4. In return they are out from under the loan they can’t afford, and you get the benefits of holding the deed to the property. 

By leveraging the seller’s credit, by keeping their loan in place, you do not need to qualify for a loan. Nor do you have to buy the property with your own credit. You agree to take over the payments, and you get the deed to the property. The loan stays in the seller’s name. 

Sometimes a seller will want a minimal down payment to help them move. You can find a way to come up with the small amount of cash. The financial benefits of holding the deed to the home are worth it. 

The Benefits of Ownership in a Subject-to Deal

Helping a seller get out from under a property they can’t afford or want provides the following benefits:

• The seller’s original interest rate, which is lower than the rate that a bank offers to real estate investors
• Potential tax advantages by buying low and selling high if home prices rise
• The benefit of paying down the equity on the loan if you have a renter in the property
• Profiting from appreciation if the market prices rise

When you are able to get deals using a subject-to method, you will be able to build wealth quickly. There is no other way to grow your investment portfolio as quickly. You might be wondering why a seller would agree to a subject-to deal.

For example, when wholesaling a property you only get the wholesaling fee. You don’t get cash flow, someone else paying down the equity on your loan or the potential of appreciation or the tax advantages. 

Learning how to close a subject-to-deal is something you must master if you want to build financial freedom. 

Last week’s news –

Why Would a Seller Sell “Subject-To”?

Buying a property subject-to the existing loan is attractive to you as an investor because you do not have to use your own credit to apply for a loan. Instead, the original loan on the property is kept in place, and you take over the payments, mitigating any risk you would be taking by using your own credit.

However, why would a seller agree to this? After all, they are leaving a loan in place that they are liable for. The answer is easy—they are motivated.

Will every seller be motivated enough to sell their property this way? No, but many will be. Not only will you help them solve a potential financial crisis they might be facing if they cannot afford their loan payments, but you will also have the chance to make a hefty profit.

In my business, I only do deals that will not only benefit me, but that will also solve a problem for the seller. It has to be mutually beneficial.

What are some reasons a seller might be motivated enough to sell subject-to?

• To stop foreclosure
• Save their credit
• Divorce
• Need money
• Want to move or buy another house
• Have already moved to another house

In many of these situations, I have been able to purchase a house subject-to from people in foreclosure, and it creates a win-win. Instead of losing their house and ruining their credit, I was able to get the deed, stop the foreclosure and bring the loan current on payments, saving their credit.

Here are some specific examples that might entice a seller to sell subject-to:

• Because you will be making a profit, you can give them some money to cover their moving costs.
• If there is equity, they might get a check at closing.
• In many cases their credit will be improved because the lender reports to the credit bureau that the loan has been brought current, thus boosting their credit score.
• They need a quick solution and do not have the time to wait for a traditional sale through a real estate agent.
• The peace of mind they get by removing that foreclosure pressure off their back.

Not all sellers that will agree to a subject-to deal will be in foreclosure. In fact, over the years I’ve purchased many houses subject-to from people who were current on their payments. For instance, if they want to buy a new home and aren’t able to get financing with their existing loan in place, they can show the lender that someone else will be making the payments which will increase their debt-to-income ratio allowing them to get approved for the new loan.

I remember many couples that were about to lose the contract on their new home because their current home would not sell. They were not able to get a new loan to complete the purchase of that new home because that existing loan was out there counting against their debt-to-income ratio. I have also purchased properties subject-to from sellers who had already purchased another home and were tired of making double payments.

As you can see, there are many examples of situations where you can help homeowners by purchasing their house subject to the existing financing. The key is understanding how you can help these sellers and building credibility with them, so they want to work with you.

How to Create a Successful Real Estate Direct Mail Marketing Campaign

When you create a real estate direct mail marketing campaign for your business, it takes more than one mailing to capture promising leads. In some cases, it can take 7-10 mailings to get noticed! 

Don’t let this discourage you. Carefully crafting a direct mail campaign can bring major success to your business. However, the type of mailing and how many times you contact a seller matter. Following these tips can help you with a mailing system that will give you qualified leads.

Successful Real Estate Direct Mail Marketing Strategies

One of the hardest parts of direct mail is getting homeowners to look at it. Creating unique mailings that will catch a seller’s attention is imperative.

• Send multiple mailings that all look different
• People respond to different things, mix it up!
• Use colorful mailings of different sizes
• Appeal to motivated sellers by making their pain points visible
• Add testimonials
• Include your contact information and a call-to-action 

You don’t need to include these items in every mailing. As we will discuss below, you can develop a real estate direct mail marketing campaign where you send multiple mailings that look differently to motivated sellers.

Frequency of Direct Mailings

Strategically deciding on a schedule to send direct mailings can help you get noticed by homeowners. As we mentioned above, it can take more than a handful of mailings for a seller to notice your mail.

First, you need to get familiar with the foreclosure process and timeline in your area. You will mostly market to sellers facing foreclosure, and sending mailings to them on a schedule based on the process can help you get noticed. 

 With motivated sellers: 

• Frequent mailings are most effective
• The highest response rate is at the beginning and at the end of the foreclosure process 

For example, in my area the foreclosure process is about 90 days. I send mail to these homes once every week for 10-weeks. The mailings are a combination of formats including letters, postcards, and an audio CD. 

How to Track Your Direct Mail Campaign

Setting up a direct mail campaign doesn’t have to be difficult. Automated programs like ProfitGrabber can track your mailings and schedule them based on the foreclosure time-frame you set. 

Automated programs also allow you to track the effectiveness of your marketing so you can change your strategy if needed. 

Thank you for visiting my Weekly News site. To make sure you stay up to date, please confirm or change your email. Thank you — Marko