How to Perform a Basic Real Estate Market Analysis

March 22, 2024

How to perform a Basic Real Estate Market Analysis

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: 

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:

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)

Basic Real Estate Market Analysis

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:

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

Total Expense: $36,500

First year cash inflow

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

How to find Motivated sellers

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.

How to Tell if a Seller Is Motivated

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

Should I invest in the Short Term Real Estate Investing versus Long Term Real Estate 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: 

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?

Short Term Real Estate Investing versus Long Term Real Estate Investing

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.

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