Evaluating what makes a good deal in real estate takes a lot of time. What do we mean when we say “I got a deal”? Does it mean you got a good investment? A better than average return? Whether you’re a realtor, investor or buyer, to be successful in real estate, you have to keep in mind three extremely important factors:
- Financial metrics.
- Hyperlocal analysis.
- Personal investment portfolio.
Let’s go through each one and break down what they mean. You may discover that you’re in a better position than you think.
Know your numbers. Numbers are everything in real estate.
A good deal is only as good as what your financial metrics can prove. Don’t make the mistake of thinking that you can spot a great bargain because you’ve closed a handful of successful real estate deals.
Even seasoned pros rely too much on their gut feelings without taking the time to go through a basic, standard pro forma analysis. Many experienced real estate investors won’t even open an Excel spreadsheet, but this is a big mistake that is easy to avoid.
The question is, what metrics should you include in your financial analysis? At a minimum, your numbers should cover in as much detail as possible:
- Capitalization rate.
- Internal rate of return.
- Cash on cash.
- Cash flow analysis.
- Past performance versus future projections.
- Gross yield.
- Rental rate.
These are the same industry-standard financial metrics that the banking industry has used for decades, so to be successful in real estate, you must know these numbers well. The next step when evaluating a deal is just as critical.
A 10% cap rate return is the same whether you are in NYC or Boca Raton, Florida; and 10% is always better than 9%. But, if you only stick to financial metrics you will miss endless opportunities that are a great deal because of hyperlocal market dynamics. You want to be comparing real estate deals relative to one another. Data without context is chaos. What makes a great real estate deal in one place may be a terrible deal in another.
For example, if you close a deal in NYC with an 8% cap rate you’ve actually done fairly well; however, that same 8% percent return would be terrible say, in Hialeah (FL), because there are many other deals there with much higher returns. If you want to snap the best returns, you’ll have to think hyperlocal.
Some real estate investors haven’t yet grasped how important hyperlocality is today. At a minimum, your hyperlocal analysis should include:
- Supply and demand.
- Inventory Availability.
- Market temperature (deal flow).
- CMAs with comps and previous sales.
- Special considerations (tourism markets).
Hyperlocal means taking all real estate data into consideration when evaluating one particular deal, even data on off-market properties. Furthermore, you must evaluate one deal at a time to ensure that you’re comparing apples to apples, and have enough insight in the area to forecast the future value of each property. This may be the most tedious part of sourcing a really good deal in real estate, but is also the one that will yield you the highest returns.
Real Estate Portfolio
There are many benefits to considering your personal investment portfolio before making any real estate deal. Surprisingly, many investors don’t have a deep understanding of their own portfolios.
What does your portfolio look like today? Evaluating your assets relative to hyperlocal analysis allows you to see where you can diversify within the real estate space itself.
A good diversified investment portfolio include stocks, bonds, cash-based assets, cryptocurrency (e.g., bitcoin), fixed-income, and real estate equity. There are several variables you must consider to find your ideal mix and risk tolerance for your investment holdings, and real estate is always a significant part of it.
Building a diverse portfolio is standard practice, but do you have a diversified portfolio within your real estate allocation? If not, you have to add diversification to your real estate assets, and be clear when the time comes to identify the next great deal, or swap a bad one for a better one.
For example, if you only hold luxury condominiums on Miami Beach, you’re one hurricane away from a ruined portfolio. When you diversify within the real estate space, you strengthen your whole portfolio, which gives you flexibility when the economy is up, down, or sideways. Look at different cities, property types, types of tenants, risk levels, flood zones, maturity, amongst the many ways to diversify your portfolio.
When you include financial metrics, hyperlocal analysis, and your personal investment portfolio, your evaluations will have much more depth and insight. You may discover that the good real estate deal you made last month is actually a better deal than you thought it was.
As real estate investors and agents we are at RealDAX, we found many challenges to finding and evaluating deals consistently like true professionals with accurate data and spent countless hours trying to figure out each deal the slow way. That’s why we built the world’s most powerful Real Estate Data Asset Exchange, and now you can have access to the fastest way to find and evaluate residential deals in seconds. If you are a real estate professional and work with buyers and investors, you owe it to yourself to take it for a spin. Go check it out here today.