Investment Analysis for Property Acquisition

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In this lesson, we will learn about information analysis. This skill involves collecting appropriate data on a property and determining its operating and financing expenses.

Investment Analysis Data

How does an investor know what a good deal is in real estate? That decision depends on careful property information analysis. Investment analysis is the process of evaluating risk and expected profitability.

Craig is preparing to buy a rental property. For the sake of ease, he is looking at a property that already has a renter living in the house with a signed lease. Aside from figuring out the property value, Craig needs to know how to find expense and income information about potential purchase. These amounts are critical in an effective investment analysis, which will ultimately drive Craig's decision on making the purchase.

Gathering Income Data

The first thing Craig wants to know is how much money the house can make. At first glance, this is pretty easy. For a currently rented house, the owner will have the lease. The lease will specify what the current rent amount is. Rent forms most of the income for a property, but income can also be generated by other services, like vending machines, storage space rentals, and late fees.

However, the lease isn't the last word in the matter. While Craig is bound by the lease until it expires, he could raise the rent after that point. The rent might be well below market value. Rental market information can be found by looking at online or local advertisements for what comparable properties are renting for. The property may rent for $1,000 a month for the duration of the lease, but Craig's research may show that he could raise the price to $1,200 after that to bring the rents up to current market rates.

Calculating Expenses

Every property has expenses. These expenses can be broken down into three primary groups: operating costs, capital expenses, and financing costs. Operating costs are the essential costs of keeping the property running on a day-to-day basis as a business investment. These include the taxes, insurance, utilities, and repairs.

Since the property Craig is looking at is already a rental, the expenses should be fairly easy to identify. Good maintenance records can show the buyer what has been fixed, what is in need of repair, and how much maintenance typically costs over time.The property tax bill is a matter of public record and utility companies can give estimates of bills based on previous use at that address.

Capital expenses include the major items that typically need work every few years. These are items that a landlord will have to save for, like replacing a roof or updating the kitchen cabinets. These items go beyond simple repair but are larger jobs that increase the value of the house. Most capital expense costs can be determined by talking to an appropriate contractor or even estimated with a shopping trip to the local home supply store.

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