How to assess the stability of a real estate investment plan

It might be tempting to make a quick investment decision with a real estate opportunity as a mortgage lender. When the market is up and prices are low, this can make a situation ideal for anyone looking to make a property investment.

However, diving headfirst into a new location could be a decision that investors will quickly regret. To assess the stability of a real estate investment plan, consider these several factors.

1. Job Growth to Vacancy Ratio

Moneylenders have to compare figures within an area of job growth and vacancy rates. A good indication is finding a place that is growing without an overload of rental homes. This factor shows there is a potential escalation in rental rates.

Job growth is a great indicator of long-term housing needs in a community. The quantity and quality of local jobs set the foundation for new household formations — such as people moving in and out.

When investors look at employment levels, they’re evaluating this potential for this growth. A job equals a paycheck and enables people to afford a home, whether they own or rent. Financial lenders can be more confident that a real estate lending plan makes sense in a location where employment is on the up-and-up.

2. Compare Prices and Inventory of Homes for Sale

When it comes to prices, many factors will indicate whether the real estate market is healthy or not. However, no one can tell exactly what the future holds with pricing.

Investors can first compare prices by performing a CMA (comparative market analysis). A CMA estimates home values and looks at other similar properties in the same area. Performing a CMA will help determine the fair market value of the property.

Essentially, investors should look at recently sold properties to see how the local market is currently fairing. Another thing to analyze is the current list of homes for sale. A low inventory will show high demand, and prices could potentially or currently be increasing.

3. Rent Potentials

Current market trends are the most telltale indicator of a real estate investment plan’s stability — how much can a new investment property pull in rent? The best way to look into this is to review recent purchase prices on a piece of property with renovations. Start with finding out the rent at the time of sale and then check into the current rents advertised.

Another factor to consider is, as always, location. This can have a direct impact on property value and overall performance. Locations with proximity to a booming job market, strong education systems, and other popular factors are typically seen as stronger investments.

3 Signs of a Bad Investment

Here are a few telltale signs that can encourage people to skip out on a bad investment.

1. Economic and Population Growth

During the early start of the pandemic, many businesses and schools were shut down by the states. As a result, economic growth and demand was stunted and many businesses needed to quickly adapt to health and safety requirements. As a result, in real estate, both commercial and residential properties were challenged by a drop in demand and tenants who suddenly lost the ability to handle monthly rents.

Of course, growth in many regions has since bounced back aggressively, creating a hot market that is particularly attractive for investments in industrial, commercial and multifamily real estate. Keep tabs on how business growth has evolved in your community over the past two years for a better picture of long-term success.

2. Floor Plan Issues

The floor plan design can make it difficult for property owners to rent out if several issues exist. For instance, a three-bedroom home has one bedroom as a loft and no door for privacy. This issue can be one central turning point for renters to walk away.

A poorly designed floor plan doesn’t have to be a major dealbreaker. However, it’s one thing to be mindful of when analyzing its potential. Real estate investors and developers should have an action plan for resolving the issue and turning a sub-optimal property into a desirable one.

3. Property Is Selling “As-Is” Without Inspection

The situation to sell a property “as-is” is relatively common, especially when it’s a fixer-upper. However, if the seller asks the buyer to withhold an inspection, this tends to be a significant red flag. There could be hidden evidence of structural damage, which can be very costly for the buyer. As a result, the property may not be a worthy investment after all.

Evaluating Real Estate Financing in 2022

Understanding which assessments to make for an investment plan can start any investor off with the right decisions. Keep in mind that no two investors will have the same methods for a real estate analysis. However, these will offer a great starting point for the next strategy of new property analysis.