Investing in real estate can be a super lucrative business, but it is also one that comes with its own set of challenges and major risks.
One of the skills you can and should master as you get into real estate investing that can almost guarantee that you’ll be a successful real estate investor is understanding the value of a property, and how it compares to others in the same location; this is commonly known as comping.
Property comping, or comparables, is the process of analyzing properties in the same area as the property you’re looking to invest in and comparing them to determine their value in relation to one another.
There are different types of property comps, and when you understand how to compare them, you get a better holistic view of their importance in real estate investing, and how they can be used to make informed decisions when buying or selling properties – especially when you do so using creative financing techniques.
Property Comping 101
I. Understanding the Local Market
As an investor, it's absolutely crucial to identify the local market where your property is located.
Don't make any assumptions about the area without doing your due diligence first. You need to research the local market conditions thoroughly, including the pace of real estate appreciation and depreciation.
Just as importantly, you need to familiarize yourself with the local property laws, zoning regulations, and building codes. This information will allow you to make informed decisions and evaluate whether a particular property is worth investing in or not. Remember, knowing your local market is the key to making smart investment choices.
II. Types of Properties: Exit strategies for investments using comps
Investors need to be assertive when it comes to understanding the value of a property. To make informed investment decisions, it's essential to evaluate the potential income and expenses of different types of properties. Understanding the factors that define a property's value can help investors analyze the benefits and drawbacks of different investment types and strategies.
What you may have originally seen as a long-term rental or an Airbnb may actually be better suited as a lease option or a short-term rental. Follow the money because nearly every property has the potential to turn a profit, it just may not be how you originally thought it would.
And remember, if you’re hesitant if you can make money on a property, ask for the necessary information and take the time to evaluate each property's income and expenses to determine its investment potential before you ever put money on the table. By being assertive and gathering all the necessary information, you can make informed decisions that lead to successful investments and can even prevent harm to your sellers.
III. Determine the Property's Value
Comping properties doesn’t have to be super complex, but it does break down into a few different strategies. One common approach is the sales comparison method, which uses sales data of similar properties to determine the market value of a property. The capitalization rate is also used to calculate the potential income generated by the property after the initial investment. To calculate this, you need to know the net operating income (NOI) and the purchase price of the investment property, or NOI/Property Value = Cap Rate.
By analyzing regional sales data and local sales data, you can identify patterns in the real estate market. If similar properties are selling for higher prices in the same neighborhood, it may indicate an opportunity for a profitable investment. You can also determine the rental strategy of the property, such as whether to use a short-term or long-term rental approach.
With a typical evaluation of a property that most sellers get, you may get the breakdown of where the appraiser got their numbers from. What you won’t see is how those numbers affect you unless you also understand how to comp a property.
This is why you go through the process of learning how to comp yourself even if other people can do it for you. If it’s your money and your own investment on the line, don’t leave things up to chance hoping they’ll be profitable.
That’s not good business. Do the work and you’ll get a profit.
IV. Analyzing the Income
We already talked about this a little in section II, but this is important enough to reemphasize how to determine your strategy here.
You'll want to assess the potential cash flow of the property by identifying the risks and expenses associated with it. And don't forget to consider how to increase your revenues and profits to maximize your investment because as inflation naturally rises over time, you’ll need to adjust the property for that inflation.
Now, remember, we’re here to help people, not to suck people dry. That’s why my business doesn’t typically hang onto a property for more than 7 years. Prices would be too high, and I would have missed my exit point, which makes the property a burden on me and the renter/seller who wants it.
V. Evaluating the Expenses
Some expenses in entering a home are recurring, while others are one-time costs.
Recurring expenses include things like maintenance, repairs, and insurance premiums and are basically things that keep the property habitable and profitable. You need to look at how these expenses will affect your company over time because that will also help you decide if they should be capitalized or expensed. One-time costs are things like property taxes and closing costs.
To ensure that the investment is a good one, it's important to understand the tax implications and risks associated with expenses. When it comes to capital expenses like maintenance, repairs, and replacements, it's important to determine whether they should be capitalized or expensed.
A good general rule of thumb is that costs for replacements or betterments of property, plant, and equipment can be capitalized when they extend the life or increase the usability of the asset.
By taking into account all the expenses associated with a property, investors can accurately determine the potential return on investment and make informed decisions.
Negotiation strategies using creative financing
This is why you learn to underwrite.
This is also why creative financing is king in real estate investing. Sometimes people’s sentimental attachment to their properties means that they think it’s worth more than it is. When a typical investor can’t meet a seller's price because of their attachment, it means the house doesn’t sell and instead, it sits on the market.
I understand underwriting. I know how to give sellers what they want and make a profit while I do it. If a seller is asking too much, I can still meet their price and they can leave with the money in their pocket they were hoping for, but it means we’ll have to work together to talk about financing terms.
They get their price. I get my property and a profit. It’s a win-win. But investors hardly buy properties this way because they don’t understand how much they can stand to make if they just understood comping and underwriting.
Underwriting
Underwriting is the process people hate doing in a typical mortgage from a bank. This is the endless cycle of back and forth with a bank to verify income, employment, housing, etc etc etc.
This is what crushes people’s hopes and dreams when they want to buy a house or even start to become an investor
In creative financing, “underwriting” just means comping. That’s really the only hard back and forth and research you need to do to get a property, and it’s completely doable, which is why we’re reclaiming the term.
This is also why we’re launching an underwriting course – so you can learn how to determine your deals and start investing without using cash, credit, or a mortgage.
Property comping is a crucial element of successful real estate investing. It provides valuable insight into the value of a property, and how it compares to others in the same location. Accurate appraisal comps can help ensure that fair sale prices are agreed upon, while rental comps can provide valuable information for landlords and investors.
I want you to be a successful investor, so in a few weeks, we’re giving you the chance to learn how to underwrite and comp as I do. If you would say that I”m a pro at real estate investing, then you need to learn how I do what I do and how I decide to do it.
Or, you can hope a stranger has your best interest at heart when you want to start investing.