What to Consider When Analyzing an Investment Property

What to Consider When Analyzing an Investment Property

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Unlike other investment opportunities, real estate is as much an art as it is a science. You could analyze statistics and research economic trends until you’re blue in the face, but you still can’t know beyond a reasonable doubt as to whether or not your investment will be a success or a failure. It takes years of experience (and even a few missed opportunities) to learn the ins and outs of the complex real estate investment market.

Table of Contents - What to Consider When Analyzing an Investment Property

Still, novice real estate investors don’t have to go into a potential investment blind. While no property investment is precisely the same as another, there are some constants to keep in mind before you make any final decisions. Here are some essential factors to take into account when you’re thinking about investing in a property.

Don’t do it on your own

Whether just you’re starting in real estate, you don’t have any interest in the day-to-day aspects of property management or you’re not confident that you have enough to cover an entire down payment, you don’t have to go through the process of real estate investment alone. Crowdfunding is one solution many investors utilize to address these concerns.

There are several ways to get into the crowdfunding game. You can seek out successful real estate professionals in your community and offer to join them on their next project. Several larger cities have professional group meetings that make these opportunities easier than you’d think. If you’re not interested in person-to-person contact, that’s no problem. You can jump online to try out a real estate crowdsourcing platform that will connect you with real estate investment opportunities without having to leave your own home.

Income is the highest priority

More than anything else, the purpose of investing in a real estate property is to achieve a steady flow of income. It’s important to worry less about the potential appreciation of your property’s value than it is to consider the potential for regular income.

Before you put down any money, do a little math:

Consider your intent

Are you purchasing the property for short-term rentals or long-term tenants? Depending on how you intend to use your property, the rent can fluctuate significantly.

Do your local history homework

Do some research on the average rent prices of the area. If you’re unsure as to whether to employ your new property as a short or long-term rental, this step could help inform your decision.

Factor in your costs

Every type of property ownership comes with its inherent costs. Regular maintenance and cleaning, for example, will detract from your property’s income, so be sure to include these costs as you’re calculating your potential income.

Don’t forget your mortgage

Finally, be sure to do the math on how long it will take to pay down the mortgage on your property. Once you know your expected year-over-year profit, you can figure out how long it will take to pay off the mortgage by taking your property’s cost and dividing it by the profit you expect to reap. For example, if your property initially costs $300,000 and you’re hoping to be able to pay down the mortgage at a rate of $10,000 a year, you can expect your mortgage to be a factor in your costs for thirty years.

Once you know how much to charge and how much running a property will cost you, you can weigh those numbers against the cost of your investment property. If your potential for profit is higher than the price of your initial investment, then you’re on the right track.

Be mindful of changing markets

There’s a lot of value (literally!) in working out the math above, but you should also be wary of staying locked-in to one specific scenario. As most investors are aware, the real estate market is subject to sometimes dramatic rises and falls over several years. As a result, it’s always a good idea to run scenarios that incorporate profit that rises and falls to match the market. Run several forecasts that help you plan for the worst and be sure you have enough cash on hand during the tough times. A financial professional can help you create these figures.

Local is the way to go

As you’re analyzing the value of potential investment properties, remember that national statistics are mostly useless. You can determine the overall trends of the broader housing market throughout the country, but that doesn’t do much good when you’re trying to determine the long-term profit afforded by a single house on a single street in one neighbourhood in a city.

The suggestion that the fortunes of one house are tied to the broader housing market isn’t as valid as some would have you believe. The best bet is to get a feel for the individual market into which you plan to invest. Local knowledge – which neighbourhoods are thriving, where local hot spots are, which communities house the best schools, hospitals, etc. – will help you determine whether a specific property will be reliable. You can use these factors when trying to determine if a particular property is on its way up or if it will be subject to grievous depreciation in the coming years.

Buy for love

When you’re investing in real estate, you should do so with the understanding that the goal is to hold onto your individual properties for as long as possible. After all, the longer you keep a property active, the more money you’re making off the strength of a single investment. When you’re making your initial investment, be sure to put your money on a property that speaks to you. Don’t let your gut do all of the talking, but it’s never a bad idea to listen to that little voice in the back of your mind, especially when it comes to investing in real estate.

No one formula guarantees real estate investing success; if there were, we’d all be millionaires. Still, there are tried and true ways to help you make a well-informed decision about your next investment.

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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.