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When identifying an investment property to purchase, it’s critical you carefully analyze the factors that determine its true value to you as an investor. Failing to look at a prospective investment holistically will leave you saddled with a property that under-performs, limits your liquidity and eats into your potential returns.
Savvy investors know how to analyze both quantitative and qualitative factors when determining the value of a prospective real estate investment:
- Quantitative factors include numbers and data points surrounding property valuation.
- Qualitative factors include less easily defined traits, like current market conditions.
To maximize your return on investment, you’ll need to consider both quantitative and qualitative factors when evaluating an investment property. Also, you’ll need to consider your own goals and objectives as an investor. Some factors may be more significant to different investors, depending on their needs and fiscal targets.
Quantitative and qualitative factors to consider
Savvy real estate investors need to consider both qualitative and quantitative factors when looking at prospective real estate investments.
There are several quantitative valuation calculations investors use to determine the ultimate value of a property.
For instance, investors can look at the amount of cash necessary to invest in a property, as well as its operational costs and current rental income, to determine its cash flow. These figures are unchanged, hard numbers, and are useful to determine the actual, hard value of a property as it stands in the current market. Investment costs include the down-payment, mortgage interest and rehabilitation expenses.
Investors can also calculate the capitalization rate of a property. This is another useful quantitative tool that helps determine the true value of a property.
Qualitative factors can be more challenging to calculate and ascertain than quantitative factors. Qualitative traits that need to be analyzed include the strength of the current real estate market, the market’s long-term outlook, the perceived desirability of the asset and the strength of your brand.
When it comes to real estate investing, many qualitative factors boil down to your ability to position the property as a desirable, attractive place to live or host a business.
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How to select the best investment property
Selecting the best investment property to meet your needs and objectives can be a true challenge. Ultimately, the property you select as an investment vehicle should move you further along your journey toward financial independence. Consider personal factors, like how much a specific investment limits your liquidity, before deciding whether an investment is right for you. Here are some of the factors to consider:
One of the first quantitative factors to analyze before investing in a property is its projected tax burden. Different jurisdictions levy different property taxes, so be prepared to do some research into the tax policies of your target market. Also, consider any homeowners’ association fees you may be liable for.
A major qualitative factor to consider is the quality of the local school district. This will go a long way toward establishing the desirability of your property to many potential renters. Even if your target tenants don’t have kids, the quality of the local school district can say a lot about the city or neighbourhood in which you’re operating.
Consider the long-term outlook of the neighbourhood. For instance, are there lots of construction cranes in your area? If so, there’s a strong likelihood the property values are on their way up. Look for signs of up-and-coming neighbourhoods and cities when searching for the perfect investment market.
Try to identify investment markets with strong job opportunities. Strong, diversified job markets mean the local economy is much more likely to be stable in the long-term, and you can command higher rental rates from your residents and tenants. Areas with strong job markets are likely to have higher net incomes.
Proximity to amenities
Is your target investment near any major amenities, like a commuter rail or subway stop? If so, this is a major qualitative factor that will positively impact the value of your investment. Searching for properties with proximity to public amenities, like mass transit, will net you a competitive edge.
Another quantitative factor you’ll need to look at is the condition of the asset itself. For instance, if you’ll need to invest in major capital improvements after acquiring an investment property, it may eat into your profitability over the long-term. Property conditions can be both qualitative and quantitative, so consider them very carefully as you chalk up the value of a potential investment.
The average rents in your target market will provide you with a better sense of the passive income you can expect to generate once you’ve acquired an asset and made any necessary improvements. It’s rare for rents to go down, so you can generally depend on them to continue rising steadily. This quantitative factor is an important one to factor in your investment plan.
Number of listings
If there are lots of vacancies in your target neighbourhood, it could be a sign the real estate market is overheated in that area. You may want to look elsewhere—your target market could be in store for a correction. A quick qualitative analysis may show lots of homes for sale, properties that have been on-market for a long time or properties that have cut their asking price in recent months.
Learning how to determine qualitative and quantitative factors will help you make savvier investment decisions. Balancing the traits of a specific prospective investment against your own needs as an investor will allow you to develop an investment strategy.
As an exercise, make it a point to identify five major qualitative and quantitative factors (each) on every property you’re considering an investment in. Exploring these variables will quickly give you insight into whether the property you like is worth your time or capital. Soon, you’ll be quick to characterize these variables in any property, leading to more confidence when investing!