Help Your Clients Put Together an Investment Property Analysis

Key Highlights

• Recent auction.com survey found that 64% of investors who buy investment properties as rentals plan to increase or keep their acquisitions
• Tips on creating investment property analysis with/for your clients

The coming year may be ripe for new real estate investors to take the plunge. Seers such as ATTOM Data Solutions and CoreLogic are predicting that home price growth will flatten in 2021 with an increase of just +1.1%. Mortgage interest rates are forecast to remain relatively flat due the Federal Reserve’s commitment to keep them low for the next 3 years. 2021 may experience a “frenzy of foreclosures” as we’re already seeing a rise in foreclosure activity despite existing moratoria remaining in place through December 31, according to both ATTOM and CoreLogic. And, according to a recent survey by Auction.com, 64% of investors who buy investment properties as rentals plan to increase or hold their acquisition through 2021.

You as an agent and/or broker may have clients wanting to become real estate investors or enlarge their existing investment portfolio. Help your clients put together an Investment Property Analysis with these tips:

1. Evaluate the property’s rental potential
   1. Location – tour the area and research data about changes in property and rental values over the 5 years
   2. Rental Strategy – determine whether your client planning on renting to short-term visitors or long-term tenants and check out the competition
   3. Target Tenants – short-term visitors and long-term tenants are “found” and “engaged” via different marketing channels and strategies – both need to amplify your client’s rental strategy
2. Do a comparative market analysis (CMA)
   1. Just as you would for an owner-occupied property, compare similar properties in the area to determine fair market value by ascertaining comps to get to potential purchase price for client’s offer
   2. CMA also gives client a fair estimate of property value when analyzing metrics such as cap rate
3. Help client get “right” investment property data
   1. Sellers often provide buyers with pro forma information (amount of rental income generated by property from monthly rent payments, utility costs, etc.)
4. Analyze metrics
   1. Net operating income (NOI) – rental income + other income (parking revenue, etc.)– operating expenses (maintenance, utilities, etc.) = NOI
      1. NOI does NOT account for debt service (mortgage payment, taxes)
   2. Cash-on-cash return
      1. Divide NOI by amount client is to pay for property including closing costs, repairs, renovations, etc.
      2. Can also be used to compare multiple properties with different amounts of down payments
      3. Capitalization rate (cap rate)
         1. Divide NOI by property valuation
         2. Higher the cap rate, the greater amount of risk AND the higher potential reward
         3. Cap rate can be used to compare multiple properties and/or how this property investment stacks up against your client’s competition

By helping your clients go through this exercise, you are helping your clients make informed choices about real estate investments. Informed choices are ALWAYS better than uninformed ones. Your clients will likely thank you for your efforts on their behalf with their loyalty and, perhaps, with partnership opportunities for their real estate investments.

Thanks to Norado Real Estate Investment and The Millionacres.