How to Practice Analyzing Rental Property Deals (Explained)

As a real estate investor, you’ll quickly learn that profits are made when the property is purchased, not when it is sold. This requires you to become excellent at analyzing deals and determining their true profit potential.

As a new rental property investor, you’ll want to practice rental property appraisals every day until it becomes second nature. You also need to be able to avoid the common mistakes made when analyzing real estate investments.

Top real estate investors have put in the time to practice analyzing real market deals that illustrate various scenarios.

Before narrowing down on one particular deal, it is important to gain valuable practice by analyzing current properties on the market.

You may attend open houses, search online for investment properties, and perform a profit analysis on many sample properties before investing in your own.

After much practice, you will start to spot a good rental property deal from a mile away. This quick guide will show you how to practice analyzing rental property deals to become the best investor you can be.

To get on the fast track to becoming a successful real estate investor, it is essential to connect to coaches and other investors who have a proven track record in rental properties.

You’ll pick up valuable strategies from those who made gains in the game.

Where Do You Start to Practice Analyzing Real Estate Deals?

Define Yourself as a Real Estate Investor

The first step to knowing what types of deals to analyze is to determine what type of real estate investor you want to be.

Ask yourself what type of rental properties do you see yourself owning? Perhaps you are more attracted to single-family homes versus multi-unit buildings.

Once you define your strategy, you’ll know which properties to target and what it takes to successfully carry out a good investment from beginning to end.

Finding Rental Properties To Practice On

Spending time practicing on live properties on the market will give you the experience you need to analyze your own deals once you’re ready to purchase.

One of the best ways to gather information is on the internet. Visit MLS listing in sites such as Trulia, Zillow, and others. These sites are filled with information about the property that is necessary as you determine if a particular deal is worth the investment.

Some investors target properties being offered at a discount such as foreclosures. You may also search in person by visiting open houses, driving around to find “For Sale By Owner” signs, and attending networking events where properties are promoted.

Carefully gather property information including taxes, expenses, and rents. You’ll frequently find all numbers you need in the MLS listing.

Once you have all the relevant information, you’ll be ready to analyze the deal using industry tools that make it easy for you and provide the most accurate results.

Rental Property Appraisal Calculator

Many websites dedicated to real estate investors feature investment calculators that help analyze your numbers such as the one found on BiggerPockets. You may find their Rental Property Calculator very helpful.

However, even with an old-fashioned Excel spreadsheet, you’ll be able to keep the information organized and practice rental property appraisals. Start a file for each property with detailed notes and pictures.

Nowadays an electronic file is just perfect for your needs as an investor.

Staying organized will quickly pay off as you notice that time is money and the more efficient you become, the more profits will ultimately result in your pocket.

It is a matter of developing systems that work and implementing them consistently.

The more deals you analyze, the better deals you’ll find. If you become efficient at finding and analyzing a real estate investment, you’ll save tons of time. You will find yourself having more time to grow your real estate business and enjoy life.

Analysis Criteria For Rental Properties

As a real estate investor focused on profitable rental properties, there are several factors you must consider when selecting your next rental property deal.

Ask yourself the following questions:

  • How much money do I want to put down to acquire the property?
  • What is a realistic interest rate based on my credit profile and loan type?
  • Do I have approximately 6% of price to cover closing costs?
  • Am I willing to buy a rehab property or only those that are “move-in ready”?
  • What holding costs can I cover while the property becomes “move-in ready”?
  • Will you manage the property on your own or hire a management company?

Data Needed For Successful Rental Property Analysis

There is vital information and financial data about the property that you must obtain such as:

  • Property specifications including square footage, type of property, number of bedrooms and bathrooms, etc.
  • Purchase price, expected closing costs, and estimated repair costs.
  • Financing information including down payment, loan amount, loan terms, and interest rate.
  • Estimated rental income from monthly rents including pet rent fees, and appliance rental fees.
  • General operating expenses such as routine maintenance and repairs, taxes and insurance, property management expenses, miscellaneous.

Practice Running the Numbers

Whether you utilize online industry tools or work from your own spreadsheet, running the numbers will help you determine if the property will yield sufficient cash flow.

Consider the following as you’re analyzing a deal:

  1. Estimate the cash flow the property can potentially provide.
  1. Is the property in optimal condition for the type of project you seek?
  1. Are you willing to offer less than the purchase price the seller is asking for?
  1. What improvements will you need to make and how much do you project to spend?
  1. What are the average rental prices in the area?
  1. Will the landlord pay for utilities or can they be individually covered by tenants?
  1. Does the property feature a good school district and other beneficial community characteristics?

Benchmarks for Analyzing Rental Properties

There is useful rules real estate investors practice to help them quickly analyze deals. Here are some of the benchmarks investors utilize:

The 1% Rule

To quickly decide if a property is worth taking a deeper look at, real estate investors often use the 1% rule of thumb. It states that the gross monthly rental income has to be at least 1% of the property’s purchase price.

The 2% Rule

This rule is a more conservative alternative to the 1% rule. Here, investors look for gross monthly rental incomes to reach a minimum of 2% of the purchase price.

The 50% Rule

This rule states that the operating expenses of an investor have to average at least 50% of the rental income. It is important to project accurate expenses for this particular property as some expenses change by region.

The 70% Rule

This rule is reserved for properties that need a lot of repairs to get them to a rentable state. It states that the purchase price of the property and repairs must be 70% of the ARV (After Repair Value).

Debt Service Coverage Ratio (DSCR)

This ratio measures the investor’s available cash flow to pay current debt obligations. Most lenders require a DSCR of at least 1.25.

Practice Makes Perfect

Once you start to get into a consistent flow of finding and analyzing rental property deals, you’ll notice that you will start to spot good deals consistently and quickly.

Get into the habit of practicing analyzing real estate deals every day.

If you become stuck don’t give up! There are many ways to analyze a deal, start with what makes sense to you and then expand from there.

Remember that practice makes perfect, the more you engage in deal analysis the more it will become second nature to you.

Keep track of your progress as you increase your knowledge. Staying organized and keeping good notes will help you as you learn to navigate the market.

A way to stay consistent is to come up with protocols set for yourself to help you stay on track.

The art of finding and analyzing deals has to be one of the first things you master as a real estate investor. Rental properties can be very lucrative if done correctly.

Final Thoughts on Practicing Analyzing Rental Property Deals

As you become an experienced rental property investor, you’ll be able to easily analyze real estate deals utilizing all of the different metrics, industry tools, and benchmark rules.

The more time you spend practicing analyzing real estate deals, the better you will become at spotting a great opportunity.

Becoming an expert at analyzing deals will make a huge difference in your bottom line. The whole purpose of acquiring a new property is that it becomes an asset to you.

Knowing how to properly choose a rental property will ensure you generate consistent and significant income year after year.

There are many resources and tools available to help you at each step of the way. As a real estate investor with more than 12 years in the industry, I have helped many individuals become full-time investors that turn a profit on every deal.

Join our conversation – Share your comments and let us know what has helped you when analyzing a real estate investment.

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