I recently met Bob at a real estate investment club meeting and he was quite frustrated. He has been attending these meetings for several months and over this timeframe, he has received a handful of leads on potential investment opportunities. But each and every opportunity failed to pan out and to date, Bob has yet to actually buy a house.
Many new investors, like Bob, have trouble pulling the trigger on a deal because they get stuck trying to understand whether the numbers make sense. There are several tools and methods for analyzing real estate investments, but the trick is to find an outlet that will give you the information you need to confidently sign on the dotted line.
Elements of a Real Estate Investment Analysis
Getting the numbers right from the start is mission-critical for making a solid real estate investment. After all, if you pay too much for the house or overlook the cost of an essential repair, it will eat into your potential returns. You’ll still find some real estate investors who break out a pen and paper to crunch the numbers. But most of today’s investors use some kind of software tool. Whether you use a simple Excel spreadsheet or fancy software, every analysis should—at minimum—cover the following basic categories.
- Cost basis. Simply put, this is the amount that you pay to purchase the property with either cash or debt obligations. It also includes any associated expenses related to the purchase such as taxes or liens that you clear in the transaction. To get the most out of your investment, you’ll want your cost basis to be as low as possible while still delivering a fair and ethical real estate transaction.
- Cost for repairs. You’ll need to itemize the costs of any necessary repairs or upgrades to make the property marketable. Some software options will make you research the costs and input the data manually. Other programs will automate this step to some extent, but proceed with caution because the software may not be accurate for your region. The only valuation method that I’m aware of that automatically figures locally-specific repair costs is ValueChek®, which is available exclusively to HomeVestors® franchisees.
- Holding costs. Every day that you hold the property equates to more money taken out of your pocket. Whether it’s paying to keep the electricity on in the house or paying the contractor for additional days to get the job done right, you’ll want to keep an eye on costs. Also, it’s wise to include a bit of a cushion in your budget because only one thing is certain: you can expect the unexpected.
- Estimated After Repair Value (ARV). The ARV is calculated based on recently sold comparables, or houses that are within the same neighborhood and have similar square footage and features. While some investors get the data on their own using Zillow, those numbers are not necessarily accurate. To get the best ARV estimate, you’re going to need access to MLS data from a real estate agent. This will give you an idea of what constitutes a fair sale price for the property once you’ve completed the rehabbing process. This is the most effective way to determine your potential return on investment.
You’ll find software to suit nearly every investing strategy, but most leave you holding the bag when it comes to actually interpreting and making sense of the data. But there is one exception.
What Valuation and Analysis Method is the Best?
The most comprehensive and user-friendly real estate analysis and valuation method that I’ve found is the proprietary ValueChek® system used by our independently owned and operated HomeVestors® franchisees. ValueChek is designed to enable anyone to analyze the cost of over 80 different repairs, which are adjusted to local market values. You’ll also have the data you need to accurately estimate the ARV, giving you the ability to make a fair offer that delivers a positive return. And this software interface doesn’t leave you hanging. If you have questions or concerns about a potential deal, the built-in messaging system allows you to contact your seasoned Development Agent for advice.
Don’t hold back on sealing the deal because you’re uncertain about the numbers. Get in touch with HomeVestors to learn more about how the best valuation tools can give you the data and insight to help you invest with confidence.
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