How to Analyze Any Buy and Hold Real Estate Deal

A Real Estate investment is one of the few tangible assets that, given the proper amount of maintenance, will appreciate in the future. There are two ways to approach a direct real estate investment: buy and flip, and buy and hold. Although buy and flip can yield quick rewards, it also involves large outlays and more risk, since most buy-and-flips involve renovating and reselling a fixer-upper.

In this post, we look into the buy and hold strategy, which doesn’t promise the immediate return of property flipping, but is much less risky. The challenge however is this: out of all the potential investment choices you can go for, which one will build wealth?

There are two drivers of return for a buy-and-hold deal – regular payments from a tenant, and the promise of future price appreciation for the property itself. You evaluate the profitability of an investment property through statement that lists down the profits and losses. However, choosing the right property is trickier than looking through a list of properties and profits, because far too many realtors and wholesalers do not present a full picture of their proposed investment:

  1. Be especially careful of projected (or pro-forma) statements, since these use estimates which, based on our experience, tend not portray the actual performance accurately. You’ll want the actual numbers to make the right decision.
  2. Secondly, you’ll want the other members of your management team, such as the property managers, insurance agents, realtors, title companies, and lawyers to look critically at the numbers.
  3. Finally, you’ll want a sense-check from three objective realtors and real estate investors who know the area well. This is important because they don’t have a stake in the outcome, and can afford to give impartial advice.

3 key ways you can use to efficiently analyze a property

With so many resources out there, getting stuck at the analysis phase is a real possibility. To prevent analysis paralysis, remember the Pareto principle: 80% of the outcome is determined by 20% of the inputs. This means that if you know the right 20% of the places to look, you can quickly get 80% of the information you need. Here are the three key ways you can use to efficiently analyze a property:

  1. rent-meterUse to quickly view the market values of a property, and to determine the rental rates in an area.Both sites are very easy to use – type in a specific address, and information aggregated from various real estate sites is immediately returned. Do note that property values may be lower than actual transacted values due to tax considerations, and that you might want to discount rental rates to account for any contingencies.
  2. Find realtors who are investor-friendly. They know what investors are looking for, and can often provide alternative deals should the current one pan out. There are three attributes of an investor-friendly agent: they are often real estate investors themselves, most of their clients are investors, and it is easy to approach and speak to them. Always go with these guys – they are worth their weight in gold, and give you the skinny on off-market properties with profit potential.
  3. Other real investors often have a wealth of information of the area they live in. Admittedly, this sounds counterintuitive – why tip off the competition? But in practice, real estate investors are a friendly bunch and will gladly help analyze your property. Most of the time, they will even check the place out, send you pictures, and give you a local’s perspective on the property.

In the next part, we take apart a profit and loss statement and use it to quickly evaluate the attractiveness of a buy-and-hold investment.


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