The Importance of Running Property Analytics
Buying real estate is fun and exciting, but ultimately real estate investment is a business. You should never forget this, whether you are buying one rental property, managing several rentals or you are flipping multiple houses a year. When you treat your real estate investments as a business and run proper analytics, you will see better results.
Running detailed analytics is one of the most important steps you need to take when looking at any investment property you are thinking about purchasing. This is where you truly make your money. Some investors think they can buy any old property and turn a profit from it. A really great, experienced investor might be able to do so. For the average investor, however, it’s not so easy. This is why analytics are so important.
First off, you want to set your goals. Rental buyers will want to set a target capitalization rate (cap rate), among other factors. Fix and flip buyers will want to determine their target return on investment (ROI). In a nutshell, you are figuring out what you need to make in order for any given real estate investment to be worthwhile. If there is no meat on the bone at the end of the day, then what’s the point? You are here to make real money—not break even, lose money or squeak out a tiny profit.
Projection of Expenses
Next, you have to look at the purchase price. How much is it going to cost you to buy the property you are looking at? This really shouldn’t require a great deal of explanation. The house costs what it costs when your final offer is accepted, and that is your most significant expense to consider.
As for other expenses, this is where it gets tricky because every deal will be different. Proper analytics and projections may make or break you when it comes to renovation costs. Most real estate investors are buying houses that need some work. This is what allows us to get properties at low prices and then sell or rent out for high profits later. In between the purchase and sale/rental, you will have to renovate, make repairs and invest in upgrades that ultimately increase the value of the house.
When running analytics on a property you are thinking about buying, you will want to carefully go through all the projected expenditures for the renovation and repair stage. Our recommendation is always to be conservative with your cost estimates. Don’t think about it from a “best-case scenario” standpoint. Think of it from a “worst-case scenario” standpoint. Budget extra time and money for all the work that needs to be done. Don’t just assume that everything will go smoothly and you will spend the minimal amount of time or money. Expect there to be complications and delays. It’s great if you ultimately come in under budget and under schedule. That’s more money in your pocket. Just run your projections conservatively so you have some wiggle room and your budget is protected in case things don’t go exactly as hoped.
Last but not least, you want to also be conservative on your resale or rental estimates. Fix and flip buyers will want to do careful market research and understand what the potential resale value of their house will be once it is renovated and ready to list on the open market. Determine an acceptable resale value minimum that ensures profitability. Anything beyond that is gravy. Again, don’t project based on best-case sales scenario. This is often a recipe for disaster as market conditions tend to change.
Buy and hold investors will also want to run conservative projections, but do even more market research as there are more factors affecting their deal. You want to look at rental prices, vacancy rates, quality of the tenant pool in the neighborhood, unemployment rates, crime rates and more. You will also want to factor in how long you intend to own the property. It’s harder to be profitable with a rental over the course of a few years versus a long-term ownership commitment. Other ongoing expenses to consider will be property taxes, HOA dues, insurance, utilities, repairs and property management fees (if hiring someone else to manage the rental).
Making Smarter Investment Decisions
The point is that you need to run detailed analytics and conservative projections for any house you are considering purchasing as an investment property. Whether you are looking to buy and hold (rental) or fix and flip (house flipping), be smart about every single real estate investment decision you make.
Home buyers who are members of the elite PropertyLark home buying network have exclusive access to our property searches and custom analytics tools. We have developed proprietary software and use our personal experience to carefully analyze every single property that comes across our table. We then pass on these great off-market deals and analytical reports to our network of buyers, so they can make better investment decisions. If you are interested in joining the PropertyLark network, please fill out the contact form and questionnaire found on our home buying portal.