I put this analysis together as much for myself as for my scant readership. Consider it my list of major considerations that need to go into any decision about allocating money towards real estate (primarily large commercial, not single family homes, in spite of some overlap).
Typically, I like to start with a macro perspective, consistent with the cycle I outlined recently. I prefer the larger, more established markets, but the analysis can be applied anywhere. In the particular market in question, focus on whether population is growing and whether employers are creating jobs. That means going there and looking around, identifying the particular sub-markets that have the positive trends developing. For example, Charlotte, NC may interest you, but there are better parts of town than others. And even if company XYZ is opening up a new plant that will create 2,000 jobs there, the positive effects will not be felt equally across the metropolis. So you need to be able to make that distinction. Again, go there, take a map, drive around and mark it up with your comments about the different neighborhoods. You can start to focus your time more efficiently afterwards.
Some of the other data points to factor in:
-Demographics, both locationally and over time. Claritas provides a service that gives you exactly that information. I like to look at population changes and median household income data.
-Economic and rental trends. I usually turn to Reis and PPR for that sort of stuff. You can learn about unemployment, rental growth rates, a hodge-podge.
After doing the above, you probably have developed a point of view on whether you like the market. And now you can start to hammer in on the micro that is more deal specific. (Note: Any deal in any market could seem cheap enough that you potentially skip the macro and head right to the micro, but then it becomes a much more speculative play. Kind of like the guy who buys a stock before earnings, expecting good news and a quick profit.) At this level, you want comfort about prevailing cap rates, recent sales and the type of product that will be attractive to your renters.
-Real Capital Analytics can give you information about recent sales.
-You'll need to shop the competitors to the property you're considering, to see how rents compare and what type of spread may exist or not.
-Is the property in question a value-add play? A mistake often made is confusing deferred maintenance with the need for a major overhaul. Depending on the market in question, and particular clientele, the wrong interpretation can be deadly for your future returns.
-Sometimes the cap rate might be expensive, but the price per unit is very cheap. And if you think the market has good growth prospects, you can still justify the purchase.
I will add to this outline as new thoughts pop into my head. But, generally, this covers a large part of my approach.
