We talk with lots of people looking to invest in property. Some of them know what they’re doing… and some of them are still in the learning process.
But, since our entire business is about finding great deals… and often passing those deals onto property investors like you at great discounts… I thought it would be a good idea to share with you some resources on how to effectively evaluate a real estate investment deal. This works in any market…
When you really boil it down… evaluating a property deal is a pretty simple process. Whether you’re looking to buy a property to flip or hold it to rent… whatever, one of the most important parts is buying it right (i.e. not overpaying).
So lets dive in.
How To Evaluate A Real Estate Deal – (for single family houses)
There are just a few main elements when you’re evaluating a deal.
- Cost of repairs needed to get it back up to good condition
- The after repair market value of the property (what it’s worth and can sell for in today’s market once it’s fixed up)
- If you’re going to buy and hold for a rental… you need to know what you can rent it out for and what your mortgage payment will be. Knowing this makes sure you’re buying so the property cash-flows each month
There are other things you can (and should) look at too… but those 3 are the main important things to look at first.
Cost of Repairs
One of the things you should do when you are looking at a property is find out how much it’ll cost you to fix it up to a point where it’s in great shape. In other words, the cost of repairs. This could be a new roof if it needs it, carpet, paint, a new kitchen, a new bathroom, work on the garden etc.
To find a good estimate of cost of repairs, the best advice we have is to get to get to know tradespeople in the area and have them walk through the properties with you to quote you on the repair costs… and build that into your offer.
After Repair Market Value
This is simple, but many investors get stuck on this part. This is essentially what you could sell the property for today… after you repaired it and brought it up to a great condition. This is found by finding out what other similar houses in the same area are actually selling for. NOTE: Don’t look at the “Listing” price… look at what houses similar to yours have actually sold for in the past 3 months. This helps you determine how much you could actually sell that house for if you had to… right now. You never want to over pay to a point where you can’t sell it for a profit in the next 3 months.
Buy And Hold For Rental
So, you’re going to buy and hold for rental? Great! You don’t need to worry about what it’ll sell for right away. What you need to know is if it’ll work out on a month to month basis. You know… cash flow.
So, talk to a mortgage broker and find out what the monthly mortgage payment will be for that specific property.
Then find out what you can rent the place out for on a monthly basis.
Then, you work backwards… and find out at what purchase price your mortgage payment will be low enough so you can make the monthly cash flow you need to make on the property. Be sure to factor in other expenses too like taxes, insurance, maintenance expenses, property management fees, and keeping money in reserves for future repairs.
Simple enough right?
From there, just make an offer. If you really want a property… find out what is the absolute max you could buy the property at… and offer that. Otherwise you may lose the deal because someone else is likely to be making an offer too.
With that said, the golden rule in property investing is to never over pay for a property!
I hope this little tutorial has helped you sharpen up your deal analysing skills…
If you have any questions at all… don’t hesitate to contact us anytime for anything.