THE RUNDOWN ON REAL ESTATE INVESTMENT VALUATION TOOLS
If you’ve been thinking about buying your first investment property, or are hoping to expand your existing portfolio, you probably have the same concern as Ron. If you don’t, you absolutely should. The importance of getting your calculations right when it comes to securing a good deal cannot be overstated. Every step of evaluating a property—assessing rehab costs, estimating the After Repair Value (ARV), and determining a fair purchase price—influences whether and how you should move forward.
You’ll still find some real estate investors who break out a pen and paper to crunch the numbers. But most of today’s investors use some kind of software tool. Whether you use a simple Excel spreadsheet or fancy software, every analysis should—at minimum—cover the following basic categories.
- Cost basis. Simply put, this is the amount that you pay to purchase the property with either cash or debt obligations. It also includes any associated expenses related to the purchase such as taxes or liens that you clear in the transaction. To get the most out of your investment, you’ll want your cost basis to be as low as possible while still delivering a fair and ethical real estate transaction.
- Cost for repairs. You’ll need to itemize the costs of any necessary repairs or upgrades to make the property marketable. Some software options will make you research the costs and input the data manually. Other programs will automate this step to some extent, but proceed with caution because the software may not be accurate for your region. The only valuation method that I’m aware of that automatically figures locally-specific repair costs is ValueChek™, which is available exclusively to HomeVestors® franchisees.
- Holding costs. Every day that you hold the property equates to more money taken out of your pocket. Whether it’s paying to keep the electricity on in the house or paying the contractor for additional days to get the job done right, you’ll want to keep an eye on costs. Also, it’s wise to include a bit of a cushion in your budget because only one thing is certain: you can expect the unexpected.
- Estimated After Repair Value (ARV). The ARV is calculated based on recently sold comparables, or houses that are within the same neighborhood and have similar square footage and features. While some investors get the data on their own using Zillow, those numbers are not necessarily accurate. To get the best ARV estimate, you’re going to need access to MLS data from a real estate agent. This will give you an idea of what constitutes a fair sale price for the property once you’ve completed the rehabbing process. This is the most effective way to determine your potential return on investment.
Getting the numbers wrong can have severe consequences. If you pay too much for a property or overspend on repairs, you put your returns at risk. Offer too little, and you might never see an acceptance. And, if you overestimate your ARV, you could end up with a house that sits on the market for a very long time. So, whether you’re looking at real estate investments in Queens, NY or in the suburbs of Chicago, you’ve got to be able to perform accurate valuations in order to make a good business out of investing. And, you’ll need to be able to do it fast so that you can make fair and timely offers before your competitors do.
Luckily, there are several real estate investment valuation tools on the market that will help you run the numbers when you find a property you’d like to buy, renovate, and sell. Let me describe a few of your options here: