How to Analyze a Potential Real Estate Deal 

If you’re a real estate investor, you’re undoubtedly aware that the world of real estate is ever-changing and evolving. Its risks and rewards are equally high. Without the right knowledge, preparation, and tools, even the most seasoned investors can find themselves in the middle of a bad real estate deal. Analyzing deals before you make them is paramount to real estate investing and making informed decisions. That’s why we made a real estate deal analysis spreadsheet that allows you to gain insight into the strength of a real estate deal and a long-term strategy for the property, including an exit/selling point.  

What is Deal Analysis? 

When you’re looking into purchasing an investment property, it’s important to meticulously examine many financial, market, and property-related factors to decide if the purchase aligns with your goals as an investor. Metrics and key performance indicators (KPIs) like cash flow, cash-on-cash return, return on investment (ROI), and cap rate can tell real estate investors much about a potential investment. But deal analysis tells you more than whether you should purchase a property. It also offers a glimpse into the financial future and helps you understand and mitigate risks that come with real estate deals.  

Deal analysis involves using critical thinking, collecting data, and performing many calculations for your desired KPIs. That’s why using a deal analysis spreadsheet is so beneficial — it does the work for you, telling the story of the property’s current state, its potential future state, and ways to know when to sell the property.  

Why Analyzing Real Estate Deals Matters 

Deal analysis is an essential step to take before committing to an investment. It’s the easiest way to stay informed about potential challenges and opportunities of investment properties before you make important financial decisions. For example, real estate deal analysis is a structured approach to investment. By setting your own goals and criteria for future rental properties, you can efficiently accept or reject investment deals based on your own standards. 

Deal analysis also allows investors to assess the risk of investing in a rental property before signing a binding agreement. Our deal analysis spreadsheet helps to highlight potential challenges or issues with a property before purchase so you can decide whether the property is worth the risk or if you should run in the other direction entirely. Further, analyzing a potential real estate investment gives you access to financial metrics to accurately and easily estimate the potential rental income of the property. 

While deal analysis isn’t the only kind of analysis investors use (many also perform comparative market analysis on their real estate investments), it is one of the most fundamental skills new investors who plan on scaling their portfolios must acquire. 

When to Use Deal Analysis Real Estate 

Thoroughly analyzing a real estate deal is always a good general practice before purchasing a property so you’re able to make a fully informed decision. Whether you’re interested in residential or commercial real estate, it’s never a good idea to skip deal analysis. But if you need more convincing, here are a few instances when analyzing a deal beforehand can be beneficial:  

1. When You’re Unsure if the Upfront Costs Will Pay Off Later

When purchasing a property, there are more upfront costs than you may imagine. Closing costs, down payments, and upfront repair costs are just a few of the major fees to pay. But can you be sure those costs will pay off down the line when you’re renting the property to tenants? 

If you’re unsure about the long-term payoff of a property, using deal analysis can help. By putting together these cost numbers and comparing them with expected income in an investment property analysis, you can calculate important metrics like cap rate, gross rent multiplier, cash flow, and gross rental yield that will shed light on whether the upfront costs will end up being profitable in the long run.

2. When You’re Searching for Guidance on When to Sell/Exit

Buying a property is one thing, but selling it is another entirely. When is the best time to sell a property? When would be the most profitable? Is it smarter not to sell at all? 

When searching for guidance, it’s a good idea to factor disposition details into your calculations and real estate deal analysis spreadsheet. If you know the property value at the time of purchase and how long you’re considering holding it, you can estimate how much value the home will appreciate and how much of a profit you can walk away with.

3. When You Want to Calculate a Potential Amortization Schedule

A mortgage is an important step when buying a home. It’s critical that you understand what your mortgage payments will look like, from how long you’ll be paying them to what the interest rate will be. This means analyzing another aspect of the deal. With the property’s purchase price, down payment, loan term, and loan interest at hand, you can plan an amortization schedule that will help you visualize your loan repayment schedule and the rate you’ll be paying monthly and yearly. The loan repayment costs will give you an idea of whether a deal is worth it financially.

4. When You Want to Become More Experienced with Analyzing Deals

Above all else, analyzing deals is important because as they say, “Practice makes perfect.” If you’re looking to become more experienced or adept at analyzing deals quickly and efficiently, you must consistently analyze real estate deals closely to learn what properties meet your wants and needs. As you grow as a real estate investor, you’ll learn what cash flow numbers meet your criteria or what net operating income you’ll need to run the property adequately. Use these to accept or reject deals on potential real estate investment property. 

Conclusion 

Deal analysis is one of the greatest tools you can wield in real estate investment. It’s helpful for understanding the strengths and weaknesses of potential properties since it helps you develop an overview of a property’s long-term strategy. Before making any investment decisions, download Innago’s deal analysis real estate worksheet to run the numbers on your next deal.