Evaluating A Real Estate Investment Deal
We talk with lots of people looking to buy real estate investment properties in Dallas Fort Worth and the surrounding areas. Some of them know what they’re doing when it comes to evaluating a real estate investment deal … and some of them are still in the learning process.
But, since our entire business is finding great deals at deep discounts… and often passing those deals onto real estate investors like you… I thought it would be a great idea to share with you some resources to use for evaluating a real estate investment deal. This works in any market… Dallas Fort Worth, surrounding areas, TX, 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.
What Goes Into Evaluating A Real Estate Deal – (for single family houses)
There are just a few main elements when you’re evaluating a deal.
- Cost of repairs needed to get it back up to good condition
- The after repair value (ARV) of the property (what it’s worth and can sell for today once it’s fixed up)
- If you’re going to buy and hold for a rental… you need to know what you can rent it out for and what your “debt service” (mortgage payment) will be. Knowing this makes sure you’re buying so the property cash-flows each month
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
One of the things you should do when you are looking at a property is to find out how much it’ll cost you to fix it up to a point where it’s in great shape. In other words, the cost of repairs. This could be a new roof if it needs it, carpet, paint, a new kitchen, yard, maybe even more.
To find a good estimate of the cost of repairs, the best advice we have is to get to know a contractor or two in your area and have them walk through the properties with you the first few times… have them quote out the repair cost… and build that into your offer.
Here’s a cool free tool for helping you evaluate your repair costs as well as prepare a Private Lender package called RehabValuator. https://tvallc.isrefer.com/go/RehabLite/MasterRE/. Check it out and see what you think… it’s free.
After Repair Value (ARV)
This is simple, but many investors get stuck on this part. This is essentially what you could sell the property for today… after you repaired it and brought it up to a great condition. This is found by finding out what other similar houses in the same area are actually selling for. NOTE: Don’t look at the “Listing” price… look at what houses similar to yours have actually SOLD for in the past 3 – 6 months. This helps you determine how much you could actually sell that house for if you had to… right now. You never want to overpay to a point where you can’t sell it for a profit in the next 3 months.
How do you find this? The best comps come from the MLS system which is accessible by realtors and appraisers. If you do not have access to MLS talk to a Realtor that you know… or an appraiser. Heck, if you don’t know one… call up a few today… tell them you have a property that you’re potentially going to sell in the near future… and ask them what they think it should sell for. The problem here is you are controlled by the realtors time available to pull comps for you. Better yet, if you are investing in Texas you can also pull your own MLS comps using the following services. They don’t allow you to access MLS however they pull comps data from MLS and send it to you and are “MUST-HAVE” tools for your REI business. Real below.
Investway – Pull comps and search MLS for investment property deals in Texas and Indiana.
MLS Deal Finder – Emails of newly listed deals on MLS along with comps to go with those deals. Get a 7 day Free Trial and Use Promo Code is “WestDFWREI” for 25% off your subscription for life.
FastCMA – Now available to pull your own true MLS comps for all your Texas investment property deals, AND delivers motivated seller leads daily for pre-foreclosure, probate, tax liens, and evictions, all to your inbox daily. Start your 7 day Trial for $1.00 and Use Promo Code “WestDFWREI” for 25% off your subscription for life.
Propelio – Allows you to pull comps, provides a CRM, and provides motivated seller leads
Buy And Hold Properties For Rentals
So, you’re going to buy and hold properties 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 property 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 will be.
Making An Offer That Gets Accepted
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 overpay 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!
To Your Success!
Tim