Property analysis is something I get a lot of questions on – especially from new real estate investors. Analyzing a real estate investment deal is an area that can be intimidating when getting started investing in apartment buildings or commercial real estate.
Analyzing properties is as much a part art as it is part science. Yes, you can input your investment property data into a spreadsheet or property analysis tool – and that is a good start. However, there is some art involved as well. After all, one of best examples is Trump's best selling book “The Art of The Deal”.
Here are the most important things you need to keep in mind about income property analysis:
Numbers are Most Important.
The value of an income property is based on the return it can provide to the investor. I don't care if it is a nice brick building in a college town. If the income does not support the project, it is probably not a winner for you. You must make sure that the numbers give a positive Net Operating Income, or essentially your return on investment.
Know Your Market Cap Rates.
Capitalization rates are a measure for the value of a property. Know the capitalization rates for similar properties in the area. You can find this out by contacting a reputable commercial broker, a commercial banker, and/or a commercial property appraiser. All of these professionals should have a good idea what the cap rates are going for in your area.
Make sure you have correct numbers. Most brokers/sellers will present you with a pro-forma property analysis. Of course, this is typically not based on “real life” numbers, but “best case” numbers. Which would you rather use when buying? Be sure you are looking at accurate data when doing your analysis.
The best way to get this is from the past 2 years property operating data. When you make an offer on a property, you will want to cross-verify this data against their income taxes, as well. Note that things will line up 100%, but they should be close- or it will raise a red flag in the buying process.
Would You Buy the Property Again?
Imagine if you will, buying the property again in 5 or more years from now. Is the area on decline? Is the area up-and-coming? Are the jobs in the area sustainable? Are there plenty of tenant conveniences nearby? What kind of development (if any) is going on in the area? These are all great questions to ask yourself when doing your property analysis. Asking whether you would buy the building all over again in the future is also a great measure of whether you should move forward on a property.