We talk with lots of people looking to buy real estate investment properties in Ontario and surrounding areas. Some of them know what they’re doing… and some of them are still in the learning process.
But, since our entire business is finding great deals… and often passing those deals onto real estate investors like you at huge discounts… I thought it would be a great idea to share with you some resources on how to effectively evaluate a real estate investment deal. This works in any market… Ontario, surrounding areas, ON, any other states across the country.
When you really boil it down… evaluating a real estate deal is a pretty simple process. If you’re looking to buy real estate as an investment, wholesale properties, hold them for rent… whatever, one of the most important parts is buying it right (i.e. – not overpaying).
So lets dive in.
How To Evaluate A Real Estate Deal – (for single family houses)
There are just a few main elements when you’re evaluating a deal.
- Cost of necessary repairs to restore it to fair condition
- The property’s post-repair market value (what it is worth and can be sold for today after being patched up)
- If you plan to acquire and hold a rental property, you must determine how much it can be rented for as well as your “debt service” (mortgage payment). Understanding this ensures you’re purchasing so the property generates a monthly profit.
There are other things you can (and should) look at too… but those 3 are the main important things to look at first.
Cost of Repairs
Finding out how much it will cost to repair up a property so that it is in excellent form is one of the things you should do while you are looking at it. Alternatively put, the price of repairs. It might be time for a new roof, carpet, paint, a new kitchen, a new yard, or even more.
The greatest advice we can give is to get to know a few contractors in your area, have them walk through the homes with you the first few times, have them estimate the cost of repairs, and then factor that into your offer.
After Repair Market Value
Although being straightforward, this is where many investors get stuck. After making the necessary repairs and bringing the property up to par, this is roughly the price you could ask for it now. This is discovered by learning the actual selling prices of other comparable homes in the neighbourhood. NOTE: Rather of focusing on the “Listing” price, consider the prices at which homes comparable to yours have actually sold during the preceding three months. This aids in figuring out how much you could actually get for that house if you had to sell it today. Never overpay to the point that you won’t be able to sell it for a profit in the next three months.
How have you located this? There are services that can assist you with this, but frequently speaking with a Realtor you know or an appraiser is the best method to learn the genuine value of a house. Hey, if you don’t know one… call up a few today… tell them you have a property that you’re maybe going to sell in the near future… and ask them what they believe it should sell for.
You intend to buy and hold for rental purposes, then? Great! You don’t need to worry about what it’ll sell for right away. What you need to know is whether it will make financial sense month to month. You’re aware of cash flow.
Hence, call to a mortgage broker (or a private lender) and find out what the monthly mortgage payment will be for that exact house.
Then determine the monthly rental rate for the property.
Buy And Hold For Rental
So, you’re going to buy and hold for rental? Great! You don’t need to worry about what it’ll sell for right away. What you need to know is if it’ll pencil out on a month to month basis. You know… cash flow.
So, talk to a mortgage broker (or a private lender) and find out what the monthly mortgage payment will be for that specific property.
Then find out what you can rent the place out for on a monthly basis.
Then, you work backwards… and find out at what purchase price your mortgage payment will be low enough so you can make the monthly cash flow you need to make on the property. Be sure to figure in other expenses too like property taxes, maintenance expenses, property management fees, and keeping money in reserves for future repairs.
So, your offer price here should be:
Monthly Mortgage – Monthly Rents – Operating Expenses – Taxes & Insurance – Monthly Cash Flow = Offer
Simple enough right?
The cool thing is, the more you’re bringing into the deal in cash… the lower your mortgage is.
Making An Offer
We’ve been talking about how to look at the numbers and analyze a real estate deal.
From there, just make an offer. Many times the properties we let you know about will already be so deeply discounted that we get multiple offers… often above our asking price.
So, if you really want a property… find out what is the bare max you could buy the property at… and offer that. Otherwise you may lose the deal because someone else is likely making an offer too.
With that said, the golden rule in real estate is to never over pay for a property. That’s why our own deal analyzing criteria is so darn strict… and why our buyers (like you) get such great deals.
I hope this little tutorial has helped you sharpen up your real estate deal analyzing skills… and we really look forward to working with you in the near future.
If you have any questions at all… don’t hesitate to contact us anytime for anything.
Happy investing!