How to Analyze a Deal
Analyzing a real estate deal
Arguably the most important step when assessing investment opportunities is performing an accurate and thorough analysis of how viable and profitable it may be. This process helps to determine key metrics like profitability, potential expenses, potential tax savings, intitial capital investment and return on investment.
Here are the steps we utilize in our deal analysis based upon our investment project goals:
Identify a Property: Ensure that the property meets demands of your investment goals. Of primary importance is location, condition, and price. Collect all financial data related to the property, including purchase price, annual property taxes, insurance costs, operating expenses, and any renovation or maintenance expenses.
Calculate Cash Flow or Payout: Estimate property expenses such as mortgage payments, taxes, insurance costs, closing costs, operating and maintenance expenses, renovation and updates. Utilize this to calculate the potential income for the property. We suggest creating a detailed Pro Forma Statement.
Calculate Key Performance Metrics: Use other key metrics to determine profitability of project such as cash-on-cash return, cap rate, and ROI.
Understand the current Market: Know how a sellers or buyers market might impact you, and your investment return, longevity, and timeline.
Understand tax implications: Consulting with a tax professional will help you understand the benefits and possible consequences of your investment.
Evaluate the risk: Identify all risks involved with the investment. This does not just include market fluctuations, but all factors that may impact the viability of your project.
Determine offer price: Perform a detailed comparative market analysis with a real estate professional to understand fully what the property is worth in today’s market.
Perform due diligence: A thorough inspection of the property is essential to assess the property condition and estimate all repairs and renovations.
Real estate investment analysis requires an extreme amount of patience and diligence as you work to fully analyze the financial picture, current market dynamics, and property opportunity. We always recommend that you have a team of professionals such as a real estate professional, lawyer, CPA, and financial advisor who can provide expertise to ensure you are making the best and most informed decision possible.