Investing in property requires intensively analyzing the market and neighborhood. A booming rental market may not be enough to justify investing in a property.
Perform a CMA to determine the fair market value of a property. This analysis will help you estimate the occupancy rate and cash flow of the investment property.
1. Review the Financials
One of the most important factors to consider when analyzing property is the building’s financial status. In most cases, buyers will need to have an attorney or accountant review the annual financial statement and determine the current and projected cash flow for the apartment building. This will give the buyer an idea of what to expect from the investment and the potential for significant appreciation.
To analyze the property, buyers need to look at several different metrics, including vacancy rates, debt-to-income ratios, capital expenditures, and operating expenses. Performing this back-of-the-envelope analysis will help the buyer understand how a property will perform, even if it is located three time zones away. This will allow the investor to make an informed decision about which property to purchase and which ones to sell or hold onto.
2. Review the Leases
If you’re investing in a multifamily property, analyzing the leases is a vital step. You’ll want to know how much the tenants are paying and whether they’re complying with their lease terms. In addition, you’ll need to know the building’s occupancy and vacancy rates. These will help you project the cash flow you can expect from your investment and decide if the property is right for you.
The first thing you’ll need to do is get a certified rent roll. This document details every space, tenant, and lease term. It’s the financial bible for commercial real estate properties. Also, ask the seller to provide you with a list of all existing leases and any amendments to those leases. If possible, speak with the tenants and review their credit reports and financial statements.
In addition to understanding the current tenant’s payments and their compliance with the lease terms, you should also learn about the building’s history. What kind of business was the previous owner in? Did they have a good relationship with the previous tenants? If you’re purchasing a multifamily property, it’s important to know the neighborhood. It’s not just the level of neatness that matters but the prevailing demographics, and the overall neighborhood vibe.
The last part of the analysis is determining the fair market value and rental income of the property. A Comparative Market Analysis (CMA) is a valuable tool for this, as it compares the property with similar ones in the area and helps you estimate its value. This will help you make a reasonable offer to the seller and determine how much you should charge as a rental fee. If you’re ready to start analyzing properties, try out Mashvisor, an investment property search and analysis tool that has helped thousands of investors find their dream properties.
3. Review the Inspection Reports
Home inspections are a standard part of the buying process, and they can be overwhelming at first. They often include a lot of bullet points, technical terms, photographs, and illustrations, and they can be difficult to decipher.
The good news is that you can learn to read and understand a home inspection report, and it will help you make wise decisions about whether or not to purchase a property. You’ll also get valuable information about how to maintain the property after you move in, which is important if you want to avoid costly repairs down the road.
A home inspector will look at a property’s foundation, roof, electrical and plumbing systems, and any signs of mold or water damage. If there are any problems, the inspector will include them in the report. However, it’s important to remember that not all problems are serious. Problems can also appear in brand-new homes, and the purpose of an inspection is to identify issues that need attention now or might need attention in the future.
If a major problem is identified, buyers can ask the seller to address it before they buy the property, negotiate a lower price, or request credits toward closing costs. They can also use the information in the report to decide if they want to walk away from the property altogether.
Ideally, buyers should attend the inspection in person. This will allow them to get real-time explanations and a chance to ask questions. They can also benefit from the guidance of a professional who has specialized training or certification in inspecting artificial stucco, log homes, and other types of construction. Your inspector can recommend experts who specialize in those fields or provide referrals from friends who have hired them in the past.
4. Review the Tax Records
If you are going to be investing a significant amount of money into a property, it is critical that you have the correct information. It is not enough to look at pro forma income statements and budgets; you also need actual expense records, property tax statements, purchase orders, receipts, etc. This will verify that the expenses and costs you are obtaining are accurate.
It will also help you determine the fair market and rental value of the property using a comparative market analysis (CMA). This compares the property to similar properties that have sold in the neighborhood. It will generate an estimate, but not a definite value, for the property. This is a vital step in the process of determining whether or not the property will provide you with a return on investment. Then you can decide how much to offer the seller and how much to charge as a rental fee.
