The 3-Step Process for Vetting a Prospective Investment Property

Today’s real estate investing climate tends to make accurate and appropriate information critical for success. If you do not know your local housing market, you could be in trouble. An excellent strategy for developing expertise in your local market is by trailing a seasoned mentor who knows what he or she is doing. In addition to teaching you tips on how to analyze current market conditions, they will also help you understand what to look for in your local housing market.

Compared with other forms of investments, real estate investing incorporates a relatively favorable risk/reward profile, but with low liquidity (easy entry and exit). Let’s consider some of the most important factors for investing in real estate.

The 3-Step Process for Evaluating a Prospective Investment Property

Evaluate the Area

What to look for? You’ll want to seek a mid-to-long haul view about how the area is going to develop over the investment period. Today’s quiet open area at the back of a private building may be created into an uproarious manufacturing facility in the future, making the private valuations less beneficial. It is fitting to carefully check the ownership, type and expected utilization of neighboring zones, establishments and free land in the region.

Evaluate the Property

Why is it important? To find real estate funding before purchasing, you need to properly evaluate your property. You can carry out a survey of the market with the help of your mentor.

What to look for? You need to make small reports to evaluate your property in a better way.

Sales Comparison Report: Recent comparable report of homes that have been sold or active in the market. These homes should have similar characteristics. For example, the same number of rooms or bathrooms or the same kind of kitchen.
Costs Report: What would be the expenses that the investment property would entail, including taxes, possible repair costs, and depreciation in the market? Whether you are buying a new property or rehabbing an old one, you need to calculate all these costs.
Income Report: Based on expected cash flows (monthly rent), you can create an income report that will show what kind of money and profits you’ll be making in the end.

Evaluate the Profits

Before buying an investment property, you need to look for what kind of profits you’ll be making. Some of the things to look forward are:

Expected cash flow from rental income; inflation favors landlords for rental income
Expected increase in net asset value due to long-term price rise
Benefits of depreciation (and available tax benefits)
Cost-benefit analysis of renovation for sale at a better price gain
Cost-benefit analysis of mortgage loans versus value

Investing in real estate is a big decision. That’s why you need to ensure that you’ve taken all the possible steps to evaluate the pros and cons of the area and property you are investing in and figure out the profits.

How do you evaluate a deal?

Please share with us in the comments section below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.