How to Analyze a Market/Property
Not sure how to properly analyze the market and the properties you’re interested in? If you’re new to the game, it’s likely that you will make mistakes when trying to evaluate the quality and outcome of your next step. That’s why it is important to learn how to analyze the market thoroughly and differentiate good opportunities from potentially bad ones.
After all, real estate is an extremely competitive industry. People often make mistakes under pressure because there are other buyers lined up to make offers on their property of choice. However, you shouldn’t let the pressure determine your next step. That’s what property and market analyzes are for!
Understand the Market First
Before we dive into the income property analysis, it is important for you as a future investor to understand the market you’re looking into. Here are a few tips that will help you do a better job at analyzing the market:
#1 Look at Historical Data
The best way to start your real estate market analysis is to look at the historical data of the location you’re interested in. What happened in the past can have a massive impact on the market at present time and in the future as well. There are plenty of online sources that provide reports on market history. All you have to do is look for your location and compare the recent reports to the older ones. Look for markets with a positive growth trend, rather than the other way around.
#2 Narrow Down Your Focus
If you do it correctly, analyzing the market can help you make smarter investment decisions. That is why you have to narrow down your focus from generic locations to a specific neighborhood you’re interested to invest in. Try to find everything you can about that specific location and determine which investment strategy would work there the best. Besides the market overview, look for specific information such as data on population and job growth, housing market activities, and quality of life.
#3 Use Multiple Sources
I always encourage my students to use multiple sources when researching a market or an area simply because some sources tend to be biased more than others. In that sense, sticking to one source is never a good idea. Some of the resources you can make good use of include local newspapers, community websites, social media, and online investment forums.
#4 Consider the Key Market Factors
Keep in mind that different market factors will affect your choice of investment strategy in a specific area. The key factors include the housing inventory, property types that are highest in demand, percentage of renter-occupied households, biggest employers, as well as most active agents and investors.
Focus on Income Property Analysis
Now that you have a better idea of how to look into a market, narrow down your focus on income property analysis. One of the most common mistakes people make when analyzing a property they want to invest in is that they let their emotions take the wheel. There is no room for emotional involvement when it comes to real estate investing. Remember, it’s always 90% numbers and 10% intuition.
Many new investors make the mistake of getting attached to a property, although they know it is not their best and most profitable option. Another common mistake here is to alter your investing criteria just to make it work with the property you feel attached to. All of this can hurt your portfolio and just hinder your growth as an investor. Thus, make sure to keep your emotions on the bench for this one.
Naturally, the analysis process will depend on the type of investment you make. Keep in mind that single family houses are not really an investment of this type. Those are homes for families. Income properties include multiple units that generate passive rental income on a monthly basis. I like to focus on 2-4 unit multi-family residential properties because these are the best and easiest way for new investors to jump into the game. With a 2-4 unit residential property, you can easily optimize the space you’re working with to increase income while keeping the expenses at a minimum.
Look at Property Details
Besides thoroughly researching the entire area and the neighborhood, it is important to prioritize the property details as well. After all, the property itself is what is going to determine your future return on investment. So, what should you be looking at here? Here’s a brief list of details to note down:
Size and square footage
Lot size
Number of units
Unit size
Number of bedrooms and bathrooms
Number of floors
Construction age
Amenities and features
Recent improvements
Needed repairs/renos
Proximity to local amenities and attractions
Run Comparables
Looking into comparables is one of the key steps to analyzing a property. Comparables are properties that sold recently in the same area you’re looking to invest in. One way to run comparables is to have your investor friendly realtor do it for you. However, make sure to do an apple-to-apple comparison, meaning only compare similar properties (in size, condition, and amenities). It is important to make a fair comparison in order to be able to evaluate the property correctly and avoid mistakes that could come after you in the future. Make sure to consider the area’s cap rate as well.
Ask for Help
If you’re doing market/property analysis for the first time, it is going to seem like a complex and intimidating task. That’s completely fine, no need to stress about it! It’s always better to seek help and guidance than try to do things based on your gut feeling.