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8 Best Ways to Evaluate Real Estate Investment Property

8 Best Ways to Evaluate Real Estate Investment Property

The real estate business’s organization differs from one country to another. In most organized nations, the market is arranged in an online database, hence easily accessible. In other states, the market is like a rough terrain on which you have to tread in search of properties for investment. Nonetheless, if you manage to get a property you would like to invest in, how should you evaluate its worth? Let us look at the eight best ways to consider when valuing a property.

Focus on the risks and liquidity

Many investors focus on the actual loan cost rather than the risk and liquidity premiums when making real estate valuation. When you examine the risk factors, you will prepare yourself to deal with them successfully.

The liquidity risk plays a significant role in deciding if you will go for the property or not. Liquidity refers to the ability of an investment to pay its loans without experiencing losses in its operation.

Examine the marketability of the investment before purchasing it. Factors that will make the property sell to its maximum include demand, level of competition, and accessibility.

If it scores high in the risks and liquidity test scale, then it is worth your coins.

Weigh the property’ worth against past sales

Due to the pandemic, it is less feasible to weigh the value of a real estate property based on the traditional approaches. The three strategies that mortgage companies, appraisers, and investors used to evaluate a property are; 

  • Direct capitalization,
  • Replacement cost, and
  • Comparable sales.

Many real estate companies are experiencing a decline in sales; the only approach is property sales records. If it is a new property in the market, you should compare it with similar properties’ sales.

Evaluate the Caps-Rate plus other factors

Open your eyes not only to the asking price versus the current cash flow of the property but other factors aiding rent growth. Analyze the population features of the locality of the property. 

What is the state of the population’s employability? What infrastructural developments in the area indicate future growth of the market? Asking yourself such questions and getting answers is key to getting a real estate property that will make quick returns to your investment.

View the property from the tenants’ position

Asking yourself critical questions about the property from a tenant’s perspective. Doing so is essential in understanding whether the property will generate enough cash flow or not. 

For instance, are the residential apartments easily accessible to tenants from the roads that connect to it? Which necessary services are near the apartments? 

The apartment’s location closer to many amenities, such as grocery shops, supermarkets, etc., adds to the property’s value. Research on the current annual rental income and assess them basing on desirability metrics like the age of the property, number of beds, size, etc.

All the above metrics will help you envisage the net profit after deducting total expenses. If the profit tally with your investment goals, you are OK to proceed.

 8 Best Ways to Evaluate Real Estate Investment Property

Employ the services of a broker  

The conventional method of drawing financial models, carrying out stress tests, etc., can be time-consuming and even complex to apply.  

Usually, it is advisable to get a broker or a third-party appraisal to evaluate with you.

During financing, the bank makes the assessments for you, but the broker’s advice correctly ties up all elements. The two have experience on what is the practical applications on the ground.

Make comparisons with the cost of building from scratch

You don’t need to be an expert contractor to pin down construction costs. You might not need to make a quotation of the materials accounting for a whole building, but having a general picture of experts’ figures is enough.  

Do not forget to include the cost of land. Together, the two summations will help you develop an income stream from the property.

After gauging your income expectation, try introducing the tenants into the picture to see how many you will require to achieve your income-goal. If the number of tenants and the rent they will pay agrees with your income stream, thumbs up.

Assess the impact of Covid-19

No one is at peace with the mention of Covid-19 in all aspects of our life, but we can not avoid it. We mention it here because it spreads through gatherings faster than in isolated environments. 

Additionally, it has brought in unemployment at a faster rate than before on a global scale. Consequently, you should not expect to invest in a property whose location is in places where job loss rates are extreme. 

High-risk areas are not suitable for the establishment of your investment. In your evaluation of risk factors, currently, Covid-19 is risk factor number one to the real estate business.

Embrace extra-self-help resources

If you are new in the industry, you don’t want to go down this lane without adequate brain-storming. If you have started, you might have realized it is a dark path to walk. To be safe, you do well to resort to experts for advice.

Apart from seeking the help of all the entities we have discussed above, investment groups, classes, books, and articles are at your disposal to help you. Online calculators are a crucial tool, just in case you rarely see eye to eye with arithmetic.

All these self-help resources help people understand what to expect, especially during the due diligence period.

The Bottom Line

Investing in real estate properties requires accurate evaluations of the industry’s essential elements to ensure profitable decisions. As discussed, the assessment stages are complex processes that require expert directives and help. During the Covid-19 pandemic, it has been challenging for all businesses. Unfortunately, several companies have closed down. People have been forced by circumstances to relocate to city suburbs due to the unbearable cost of living. 

As a result, a keen evaluation of the property to invest in is key to the success that you envisage. Due to high investment risks, we recommend seeking help from professionals, such as Loan Advisor. Always be up-to-date with market information.