Deciding to invest in real estate and analyzing a potential property investment can be time-consuming, especially for those new to it.
It’s no secret that property analysis is vital to any successful investment strategy, but it can be challenging to know where to start. Even experienced investors can struggle to painstakingly assess all the factors in purchasing a property.
By performing an accurate and comprehensive analysis, real estate investors can gain invaluable insights into the potential return they could earn from their investment.
This article will cover everything you need to know about property analysis and what to consider when investing in real estate.
What is a CRE Property Analysis?
A CRE property analysis comprehensively evaluates an investor’s commercial real estate investments. It measures the potential profitability of a property, assesses its risk level, and compares it to other investments on the market.
It includes assessing a particular property’s financial, legal, and investment aspects to determine whether it’s a suitable investment opportunity. The analysis looks at the current market trends and statistical data to estimate future returns on the investment.
A CRE property analysis aims to give investors an accurate assessment of their investments’ performance and expected return through rental income, capital appreciation, or other metrics such as cash flow, occupancy rates, cash-on-cash return, and debt service coverage ratios.
What Does a CRE Property Analysis Include?
A property analysis examines the physical characteristics like age, condition, location, amenities, and economic aspects such as rental rates and mortgage payments.
Additionally, a CRE property analysis will include detailed research into local economic conditions, demographics, and infrastructure that may impact rental demand in the area.
Using a CRE property analysis, investors must consider factors like supply and demand dynamics in the local market and current zoning regulations that could affect future development opportunities and rental income growth.
Specifically, this type of analysis looks at multiple factors, including:
- Current market value
- Potential risks and returns on investment of any given property
- Rent rolls
- Tenant profiles
- Vacancy levels
- Capital expenditures
- Income statements
- Operating expenses
- Cash flow
- Potential risks
- Real estate market
What Are the Benefits of a CRE Property Analysis?
According to 2021 Census data, rental properties amounted to about 20 million properties and contained 48.2 million rental units. 70% of these are owned by individual investors—showing that real estate investing continues to be popular.
With a CRE property analysis, real estate investors can uncover potential risks and opportunities linked with any potential properties they consider investing in.
A CRE property analysis can shed light on how investors can improve the performance of their property cash flows as it points out potential growth areas.
An in-depth analysis helps investors choose which properties to target for purchase or development by considering a variety of financial, legal, and investment aspects.
Elements of a Property Analysis
A property analysis has various elements that determine if an investment will perform (or currently perform as expected) or if they should consider alternative investments.
Net Operating Income
Net operating income (NOI) is used to measure the operating performance of a property. NOI is calculated by subtracting all operating expenses from a property’s total income.
NOI allows investors to assess a property’s cash flow without considering debt service payments. It reflects how much money the property will generate. It can serve as a valuable indicator of whether a particular market or property type is generating enough cash flow over time.
As with any metric, however, remember that NOI doesn’t precisely reflect a CRE investment’s performance. The amount available after taking out total expenses may vary from month to month and may not provide enough detail for investors looking for deeper insights into their investments. It also doesn’t take into account any capital improvements or money invested in the property.
Additionally, since this number doesn’t include debt service payments, investors must still factor those payments into their decisions when determining return on investment (ROI).
Property income is an essential element of a commercial real estate property analysis, as it helps investors determine the return on investment they can expect from a particular property. The property’s gross income generally consists of all the money generated from tenants and other sources, such as parking fees, late fees, utilities, and other rental-related revenues.
When calculating the gross income of a property, investors must account for potential vacancies by subtracting any anticipated income losses due to vacancy periods.
By accurately calculating the gross income of a property, investors can use this information better to estimate the net operating income (NOI) that a given property can generate. With this information in hand, investors can then compare the NOI with their desired rate of return to determine whether or not an investment property is worthwhile.
It’s also crucial for calculating the value of the property asset relative to competing properties in the marketplace. Knowing how much rental revenue can be generated over time indicates how much cash flow you may enjoy when investing in commercial real estate assets.
Investors must be mindful of market conditions when evaluating potential investments in commercial real estate assets. Factors like purchase price, asking price, location, tenant turnover rates, and current average rental rates should all be considered when estimating how much rent a property can generate over time.
Additionally, understanding the nuances of local laws about renting out residential or commercial units can help investors make informed decisions about their investments to maximize their return on investment while minimizing their risks.
Expenses are critical to any commercial real estate (CRE) property analysis. Not only do they impact the overall financial performance of a property, but it also indicates how well the asset has been maintained and if certain upgrades need to be made. Understanding expenses can help investors determine if a purchase is worth their time and money.
Expenses typically include the following:
- Property taxes
- Mortgage interest
- Property management fees
- Repairs and maintenance
- Advertising and marketing
- Legal fees for leases and contracts
- Loan origination fees
- Appraisal costs
- Accounting fees for managing finances
When analyzing expenses and returns from CRE investments, it’s important to consider the long-term trends of fixed and variable costs that may affect the overall profitability of a particular asset.
Fixed costs like insurance premiums or loan payments don’t typically fluctuate significantly over time. Variable costs, however, such as utilities or repairs, may vary based on market conditions or the tenant’s use of space.
Understanding how these different expenses interact over time is key to understanding potential CRE investments.
What to Consider When Analyzing Investment Properties
Here are some essential elements to consider when analyzing investment properties and how these factors can help determine whether or not a commercial real estate asset is worth investors’ time and money.
Cash flow is the amount left over after all the expenses associated with a property are paid. In other words, it’s income minus expenses.
When determining the cash flow for a property, investors must go beyond just down payment, tenant rent payments, and mortgage payments.
Other important factors include the following:
- HOA fees
- Maintenance costs
- Advertising expenses
- Landscaping costs
By examining these elements, investors can better understand how much money they’ll make from an investment property regularly.
For example, if an investor has determined that their annual rental income is $25,000 and their annual expenses are $15,000, their annual cash flow would be $10,000.
However, if they haven’t considered additional expenses such as HOA fees or landscaping costs, this number may be inaccurate and result in lower profits than initially expected.
Investors should also be aware that cash flow can be affected by factors outside of the property’s control. For example, changes in market conditions or interest rates can impact the amount of money an investment property generates. Seasonal trends can also affect rental income and vacancy rates.
Understanding the cash flow of an investment property allows investors to make more informed decisions about potential investments by providing insight into whether or not the returns will be worth the risk associated with a particular deal.
Rate of Return
The rate of return measures how much profit you can make on your investment. It’s calculated by taking the total cash flow generated by the rental property and dividing it by the cost of your investment.
For example, if your property generates $2,000 in monthly rent and your total costs are $60,000 then your rate of return would be 3.33%.
A higher return rate means you earn more money for every dollar invested. It also indicates a healthier cash flow from the rental income—ensuring you can sustainably maintain and manage the property over time.
The rate of return can be used to compare different investments against each other to determine which one may be more profitable in terms of returns. A higher rate of return means you will make more money over time, while a lower rate could signify an investment with less profit potential.
When comparing income-producing properties, investors should look at both historical and projected rates of return to get an accurate picture of how each property has performed in the past and how it may perform in the future.
Capitalization rate calculates the potential return on their investment. To determine the capitalization rate, divide the net operating income by the total value of the property.
Capitalization rate is often used to measure risk associated with an investment. It also serves as a benchmark when comparing similar properties since it provides an indication of the expected return on investment (ROI).
When doing a comparative market analysis, real estate investors should pay attention to the capitalization rate of an investment property.
A cap rate between 5% and 10% is considered good for commercial property investments, including multifamily and professional properties.
Discover How Blooma Can Help You Analyze Potential Investments
Blooma was created to make commercial and rental property analysis easy and straightforward for everyone. With our intuitive platform, you can quickly and easily measure the potential profitability of a property, assess its risk level, and compare it to other investments on the market.
With Blooma, you can easily estimate valuations, size up deals accurately, and review up to 100 comparables per deal. Plus, it will build a comp set that accurately reflects the market value of your subject property.
We understand how important it is to make sound investment decisions. Blooma’s end-to-end solution empowers investment analysis by giving you the data and insights to weigh opportunities.
Take advantage of our powerful suite of tools today and confidently evaluate each investment. Let us help make sure your next investment is a success!
Book a demo today to find out how Blooma can help with your property investment analysis needs.