Simple Guide to Real Estate Investment Property Evaluation

In this post, I am going to show the exact steps I take to evaluate a potential real estate investment property. The focus will be on single family residences, but this method can be applied to other types of property. Also, I am going to include the actual spreadsheet I use to input the obtained values, and work the numbers. With the knowledge and tools that you will find here, you should be able to estimate your costs for a real estate property, and consequently, the profit you should expect to make from the deal. The only thing not included in this spreadsheet are any repair costs and holding costs associated with a potential real estate investment property, as this will be covered in a future post. Ok, let’s look at each of the steps carefully:

Real Estate Market Research

  • Know the market value of the potential real estate investment property.
    Have your trusty realtor run a CMA for the area over the last 6 months. If there is a lot of activity in the particular market you are in, have the realtor run the CMA for just the street where the subject property is located. The closer and more comparable the sold properties are to the subject property, the more reliable the information will be.
  • Know the market rent for comparable investment properties.
    Again, use your realtor or property manager for this one, or one in the area. Ask them what a comparable home might rent for in the neighborhood you are looking. Be specific; give them the square feet, number of bedrooms and bathrooms, garage capacity, and street where the real estate is located. Ask them if they have managed any properties in the area, and what they are getting in rent. Some realtors will provide rental listings online, or submit them to the local newspaper.
  • Know the yearly tax amount of the potential real estate investment property.
    Typically, this information can be found online. Check your appropriate county’s website for tax information. If you cannot find the website, give the county courthouse a call, as this is public information.

Run the Numbers

This is my favorite part. This is where the Potential Real Estate Investment Property Estimator comes into play, and you find out how low your offer must be for you to make the kind of money you want to make. Remember “The One Key to Real Estate Investing” – buy right.

  1. On the left hand side. input the market value, market rent, and yearly tax amount for the potential real estate investment property that you have obtained into the appropriate cells of the spreadsheet. Hold off on inputting your offer amount for now.
  2. The No of Units cell is reserved for when you are evaluating a duplex, fourplex or other multifamily dwelling. Leave this at 1 for single family residences.
  3. The Closing Costs cell is a percentage that you would be willing to spend to sell the property (including realtor fees, doc fees, and any other fees to close the sale of the property). In general, I am not willing to pay more than 9% of the sales price for closing costs, although I am a realtor, so some of the expense will come back to me, 🙂
  4. On the right hand side of the input area, input the necessary items per your lender. Be sure your lender gives you a good faith estimate so that you can count on the accuracy of the items.
  5. Input your desired offer amount (I usually start around 20k less than the asking price, and work my way down from there). When the income/profit reaches the level you want in the automatic calculation area, PRESTO! You now have an offer you can feel good about.

Once you have your offer, I recommend submitting a slightly lower offer, just so that you have room to negotiate up if necessary. Be firm though, have a definite top price that you will not go over. Do not get emotional or you will lose. You may download the spreadsheet here:

Potential Real Estate Investment Property Estimator.xls

Note: The default values provided in the Potential Real Estate Investment Property Estimator are estimates only.

18 thoughts on “Simple Guide to Real Estate Investment Property Evaluation

  1. Costa Rica Real Estate Guy:

    Yes, you are correct. There are other methods besides the market survey to ascertain market value. Methods such as the income approach, cost approach, etc. However, this post details a simple guide/approach to investment property evaulation, and is intended for investors that are looking for single family residences, or perhaps duplex/fourplexes.

    Most realtors (at least that I know of) would say that the market survey is the “best” indication of value. It has worked for me so far!! I appreciate the feedback. In a later post, I may describe some of the alternate methods to estimating value. Any other thoughts would be well appreciated!

  2. Pingback: Real Estate Analysis Spreadsheet

  3. I don’t understand the spread sheet; if you make the holding months = payback in months I would expect for you to be making all kinds of profit at that point; but the spreadsheet doesn’t reflect that in the calculations. It seems the formula is for flipping rather than holding because you seem to make the most money by selling quickly; according to the calculations in that spread sheet.

  4. Dennis:

    The Net Rent Income showed in the estimator spreadsheet is for one month’s worth of rent. You would need to extrapolate for 1 year, etc. Really, I should re-label them to say Gross Rent Revenue, and Gross Monthly Rent Income. Does that make better sense?

  5. I understand what your driving at; The formula needs a bit of tweeking then as well; but I was thinking that I was attempting to perhaps use this in a way it is not intended to be used. I was attempting to figure out what most optimal hold time was on a rental I already have owned for 33 months is. I purchase below market value; as I did my present residence – than you to a very good friend of mine who is a real estate broker/investor. However, I have been attempting to learn more about what he does since the majority of my wealth came from that individual and it would have taken me 10 years to save what he made me last year. In fact; I really only ever dreamed of having a single home someday. My eyes have now opened…

  6. Hi Jeffry,

    Thanks for this, I’m actually about to enter the property market for the first time, so this will be pretty invaluable, as I’m obviously quite a newby with regards to costs / expenses etc.

  7. You do a good job of breaking down the basics. For the beginner, I’d almost recommend books like “Millionaire by 30” by Alan Corey. He similarly shows how it’s possible to go from knowing nothing about real estate to being able to see and take advantage of trends in the real estate market (albeit on a much less technical level).

  8. Great article! Evaluating every investment property is very important, because all of the money made in real estate is made when you purchase the property. Buy at the right price with the right terms and you will be successful.

  9. Hello there
    Kindly assist me with a sample of a spreadsheet in-:
    Market study research – design instruments and data processing methods that you would require for the study, this is for real estate and I am currently with studies of NQF 5 level.
    I would appreciate to have printed to add amongst my studies. The internet is not so assisting or somehting I cannot do.
    Thanking you in avance.

    Sally Marais
    South Africa – Eastern Cape

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