The real estate business can be lucrative and offer many money-making opportunities.
However, it’s crucial to understand your costs before investing in a specific property to ensure you’ll make money.
Check out these few techniques to help you decide if a home is a good real estate investment.
Calculate the Expected Cash Flow
Before deciding if a home is a good investment, consider how much money it’s likely to bring in.
You can get this information by reviewing a competitive analysis of nearby rental properties.
Of course, if you plan to make renovations and sell the home for a profit, you’ll want to work with a local real estate agent to understand what similar homes are selling for in the market after accounting for planned updates and renovations.
Look at the average rent or sale price in the neighborhood.
Compare the home you’re considering buying against the square footage, number of bedrooms and bathrooms, and outdoor space.
Make sure you also consider how long the property has been on the market. Just because someone charges a specific price doesn’t mean they’ll get it.
Review Local Area Demand
Reviewing the local area demand can help decide how easy it will be to sell or rent your property once you’re finished with renovations.
Consider the number of people seeking housing in the area.
Work with a licensed real estate agent to identify the most populated cities and where housing is in most demand.
Arizona has a booming real estate market.
Some of the top cities most in demand include Phoenix, Scottsdale, Mesa, and Tucson.
Understand Buying Costs
You’ll also want to understand all the costs of buying a property.
The sale price is just one number and isn’t a full reflection of what you’ll pay out of pocket.
Buying a home involves property taxes, insurance, homeowner’s association (HOA) fees, and closing costs.
Most lenders also require a down payment of somewhere between 3-20%.
You’ll also pay fees such as appraisal, title insurance, lender fee, and origination fee.
Don’t forget about an inspection, which is crucial to ensure you buy a home in good condition.
Your total closing costs will vary, depending on the home’s price and the lender you choose.
You won’t pay real estate commissions unless you plan to renovate and sell the property.
However, you may have to pay a property manager to screen applicants if you plan on renting out the home.
Review the Costs of Doing Business
Investing in real estate is a business, and there are costs of doing business.
Some of these costs include property manager fees, cleaning, maintenance, and repairs.
You’ll also have to cover the mortgage payments until you sell or rent the home.
Some real estate investors may also incur travel fees for routinely visiting the property for inspections or showings.
Calculate these costs to understand how much you’ll pay before earning on the real estate investment.
Renting a home usually also comes with marketing fees. Keep in mind that many of these costs are ongoing.
While you may not have to pay to screen tenants each year, you will each time a tenant moves out.
You’ll also have to deep clean the property and make any necessary repairs or renovations between tenants.
Check your finances before investing, so you know you can afford the ongoing costs you earn a profit.
Predict Increased Value
Most homes increase in value over time, so you can also include this in your calculations.
How much you can expect the property to increase in value depends on location, sale price, and what renovations or repairs you make.
Home’s also build equity, which is the amount of the home you own without a loan.
Real estate investors typically rely on equity to improve or purchase additional investment properties.
However, keep in mind that you won’t build much equity in the first few years of owning the property.
Much of your monthly payment goes toward interest rather than off the loan principal.
You could build equity faster by applying extra to your monthly payment.
Use Calculation Models
Real estate investors typically use calculation models to predict cost and profit.
The sales comparison approach considers the price earned of comparable recently sold or rented properties.
The cost approach uses the total cost of land and construction minus the deprecation.
The income approach, perhaps one of the most appropriate for a real estate investment property, uses expected cash flows.
Calculating buying costs, repairs, renovations, and upkeep is an important part of investing in real estate.
Doing so gives you a clearer understanding of what you can expect to pay to maintain the property, plus how much you’ll earn.
Of course, choosing the right loan and lender are also crucial to making money on your real estate investment.