Investment property analysis: A Beginners Guide is really going to help you on your way to being able to analyse a property deal to make sure that it stacks up no matter what strategy you’ll be looking to source for.
In my HOW TO SOURCE PROPERTY DEALS FOR YOUR OWN PORTFOLIO blog post we talked about the single most important part of the property investment process being lead generation.
Well, a close second is investment property analysis! And the only reason it’s second is because without leads you won’t have anything to analyse!
But how do we evaluate a property? How do we know if it’s a good deal or not? How do we know an investor will be interested in the deal we’ve packaged up?
I’m going to break it down for you bit by bit, strategy by strategy, so by the end of this you will have a real understanding of how to do your own investment property analysis.
In order to be able to assess whether a deal is ‘good’ or not, you first need to understand what ‘good’ looks like.
This will depend on the strategy you have chosen to focus on and will also depend on the area of the country you’re looking in.
You’ll be glad to hear you don’t need to have degree level maths or some property investment superpower to find good deals! There’s a structure I will give you for each strategy and the more you practise, the quicker you will get at spotting great deals when you come across them.
Before I get to the strategy specific stuff you are going to need to grasp the basics:
What I’ll do is go into detail on each of these 4 essential ways how to evaluate a property and then give you a key summary of the ones you will need to prioritise depending on which strategy you are focused on.
Unfortunately, estate/letting agents have a habit of looking at property values through rose tinted spectacles! They do represent the property owner (vendor/landlord) which means they are tasked with getting the highest possible price, but this doesn’t necessarily mean the price they are marketing it for is the actual market value price!
Understanding actual market value is one of the first skills you need to learn for any strategy that requires a purchase (whether you’re buying now or in the future – such as Lease Options). Knowing how to work this out will demonstrate to agents you know what you’re talking about and this will certainly help you when it comes to the offer stage!
Appraising property is something I have done for over 14 years now and what I am about to run through with you is the process I have developed over this time to accurately appraise literally thousands of properties, initially as an Estate/Letting Agent and more recently as a deal packager and investor.
So here we go…
One of the great things about Rightmove, when it comes to deal analysis, is that it holds past sale price information from Land Registry since digital records started being recorded back in the mid 90’s.
Don’t worry though, we’re not really that interested in data that old. (Apart from looking at the scarily low prices people used to pay for property)! What we’re interested in is the more recent sold price data.
Ideally you will find properties that have sold within the past 12 months on the same street. The more recent the better as this is a clear sign of current market conditions.
Of course, there are anomalies you watch out for such as auction sales, private sales etc but 90% of the time you can rely on this information.
I always work with 3’s. I look for 3 of the most recent house sales of similar property types in the area. Like we mentioned above, on the same or neighbouring streets.
When gathering the information, you also need to make sure the properties are in similar condition. This is important because a property that has been totally refurbished will usually sell for a much higher price than one that needs a lot of work. If you don’t check you could end up with an actual market value that is slightly out and slightly out could be the difference between a good deal and a terrible deal!
Once you have 3 recently sold properties that are in similar condition in the same area you add them all up, divide that number by 3 and you have an average which you can use as a guide for the actual market value of that property.
(Comparable 1 + Comparable 2 + Comparable 3) / 3 = Actual Market Value
Simple, right!?
8/10 times you will find comparables which will allow you to work out the actual market value but on occasion you may find there are no recent or local comparables.
So, what do you do in these instances?
Well, you can either widen your search area or you can go back in time a little further and allow for a little bit of leeway regarding how much the property may have appreciated in that time. But usually values won’t have risen too much over a 12-24 month period so you can be pretty sure you’re there or thereabouts.
Click here to download a free copy of the Strategy Specific Due Diligence Checklist
Another key deal analysis skill you need to learn, and master is estimating refurbishments without the need to have a builder with you every time.
The reality is, it’s just not feasible for you to have your builder with you at every viewing you go to (and that’s if you already have a trusted/preferred builder). What this means is you’re going to need to learn how to quickly estimate the ‘usual’ costs associated with refurbishing property and this applies whether you’re buying the property or taking it on a rent to rent / ‘no money down’ basis.
You don’t need to be an experienced tradesperson to be able to do this, but you will need to find out approximate costs for several of the main jobs usually needed.
Whilst not exhaustive, here’s a list of some of the main ones you need to be aware of:
You will be able to find a rough price of what it costs to do each of these by asking other local investors or even when you’re speaking with tradespeople as you build your network.
Nothing will ever replace an actual estimate from a professional tradesperson for works required but this will allow you to work out roughly how much you need to budget for in order to ensure you’re giving yourself the best chance of achieving your desired return on investment (ROI).
When buying property there’s always going to be an element of trying to predict the future value, whether you want to refinance and hold longer term or flip for profit shorter term.
Of course, this isn’t just a ‘finger in the air’ prediction, you are going to use Rightmove again to try and determine what the future value might be by looking at property currently on the market.
Wait a minute, didn’t I say don’t always trust agents’ values??
Yes, and I still stand by that statement, but usually properties that have been refurbished will give you an idea of what could be achievable based on looking at those which have sold (SSTC) which is a simple check box on Rightmove search criteria.
But remember, when you’re trying to predict the future, always err on the side of caution! That doesn’t mean you have to be pessimistic, but you do have to be realistic. It’s always better to be pleasantly surprised when the surveyor comes back to value your completed project rather than woefully disappointed because you were a little too optimistic!
You will improve with practise which means you need to be viewing a lot of houses, filling in a lot of deal calculators and constantly checking how the market in your area is changing/moving.
Ok, so you now know the basics of appraising property and estimating refurbs but what if you are looking to rent the property out, or you’ve taken on a “no money down” deal?
The final investment property analysis technique I am going to show relates to rental values.
In a very similar way to gathering comparables for sale, we are going to use Rightmove and SpareRoom. Each is used for different types of rental property analysis which I will break down for you now.
Rightmove is going to be the site you use for single let comparables. The main reason for this is agents offering standard single let properties will usually advertise on Rightmove. Certainly, the agents with the most stock will.
Single let values tend to fall within a range of £50 per month. This means a rental value might be £500 to £550 per month. As you would expect, the better quality property will achieve the higher end and the not so great property, the lower end of the range. Of course, properties can achieve more or less than the range value depending on how amazing or how awful the property is but for the purposes of this technique we will be using this method.
In big towns and cities, you will usually find quite a lot of similar properties, to the one you are trying to value, on the market at any given time. Search through these and look for 3 properties currently on the market which are the same size, type and in a similar condition. Then, as with properties for sale, add them up and divide by the number of properties you’re using as comps.
(Rental 1 + Rental 2 + Rental 3) / 3 = Rental Value
There is a slight difference when it comes to valuing rooms in that you are going to use a different website – spareroom.co.uk
This is purely down to the fact that SpareRoom is dedicated to room letting and therefore you are going to have a much better idea regarding room rates per person, the quality of what’s available in your area and the demand (another important part of rental property analysis).
SpareRoom.co.uk
As before, you are going to look for properties which are in the same area as the property you are analysing. You are going to take 3-5 comparables of similar rooms to the standard you will be refurbishing them to and use the average of these as your room valuation.
Another quick, but incredibly important, bit of due diligence you can do with spareroom.co.uk is find out whether there’s a high demand for rooms in the area your lead is in. Demand is how many people are looking for rooms, supply is how many rooms are available.
You can use the filters on spareroom’s search box to look for “rooms wanted” and “rooms available”. Ideally you want “rooms wanted” to exceed “rooms available” in order to have a good idea your rooms will let should you take the property on.
Don’t worry if the numbers aren’t overwhelmingly in favour of demand over available as you can check to see the quality of what’s available and the pricing. You can always do your due diligence basing your numbers on a lower rental income so you can undercut what’s currently available!
In this post Investment property analysis: A Beginners Guide I’ve tried to summarise the key elements required when it comes to property investment analysis but there is a little more to it than just the 4 techniques we’ve run through here.
However, it is enough to get you going and the more properties you view the more practise you will get. The more practise you get, the quicker you will be able to analyse deals and assess whether what you’re viewing has potential or not at the viewing itself!
Just remember, be realistic NOT optimistic and if you’re ever in any doubt ask someone with more experience for advice, as the last thing you want when investing in property is a liability rather than a cash flowing asset!
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