How To Analyse A Property Deal

We speak with lots of people looking to buy investment properties in Manchester, Leeds, Sheffield and other cities around the North of England. Some of them already know how to analyse a property deal … and some of them are still in the learning process.

But, since our entire business is about finding great deals… and passing those deals onto property investors … I thought it would be a good idea to share with you some ideas on how to analyse a property deal. This works in most areas… but London prices are obviously different to the rest of the country.

When you really boil it down… analysing a property deal is a pretty simple process. If you’re looking to buy a property to refurb and flip… or one to keep as a rental property, one of the most important things is buying it right in the first place (i.e. – not overpaying).

So lets dive in.

How To Analyse A Property Deal

(For Buy to Let Houses)

There are a few main elements to look at when you’re evaluating a deal.

• Purchase costs, including stamp duty, mortgage and solicitors fees
• Cost of repairs needed to get the property back up to a good condition
• What you’re going to do with the property when it’s done.
• The market value of the property (what it will be worth and would sell for once it’s fixed up)
• If you’re going to keep it as a rental… you need to know what you can rent it out for and what your mortgage and costs will be so you can work out your profit.
• Getting this right makes sure you buy right, so the property cash-flows each month or you make a profit on the sale.

There are other things you can (and should) look for too… but those are the main things to look at first.

Cost of Repairs

One of the things you should do when you are looking to refurb a property is to decide what standard you are looking to do it up to? If there are other rental properties in the area, what are they like? Do you want yours to be the same or better?

Work out how much it’ll cost you to fix it up to a point where it will attract the type of tenant or buyer you are looking for. Do you go for the better quality kitchen and bathroom or just the standard ones?

Are you looking for high end or cheap and cheerful? Higher end properties usually attract people who are more likely to look after the property. If you show your tenant that you don’t really care about the property, the tenant is likely to think the same way about it, meaning you may end up spending a lot more on repairs over time.

Get reliable cost estimates for the work needed, don’t guess. It’s real money you’ll be spending. If you go over budget, you won’t make the profit you were hoping for, defeating the object of buying the property… or even worse, you may run out of money and have to sell the property before it’s finished, maybe even at a loss so get a contractor or two to quote for the repair costs so you know what to expect.

Market Value

This is simple, but many investors get stuck on this. Market value is essentially what you could sell the property for tomorrow… after you’ve repaired it and brought it up to a good standard. You do this by finding out what other similar houses in the same area and in similar condition are actually selling for.

Don’t look at the “asking” price… look at what houses similar to yours have actually sold for in the past 3 months. This helps you determine how much you could realistically sell that house for if you had to put it back on the market…tomorrow. You don’t want to spend more than you can sell it for in the next 3 months.

Where do you find this? You can find house prices on Rightmove and Zoopla easily enough. Or speak to a local estate agent who will know what houses are selling and renting for in the area.

Buying a Rental Property

If you don’t intend to sell it and want to keep it as a rental, the resale price is less relevant (but always interesting). What you need to know is if it will cash flow on a month to month basis. Research local rents in the area. Again, you can find these on Rightmove and Zoopla or speak to a local lettings agent.

Once you know what rent will be coming in, the next thing to look at is how much your mortgage payment will cost? Allow a bit of breathing space in case your payment goes up with interest rates. Next you want to factor in running costs. Most investors will allow 10% of the incoming rent for management and another 10% for repairs and maintenance. What’s left after that is your profit.

What Return Are You Looking To Get?

If you have been frustrated by the low interest you’ve been getting from your bank account and want to get a better return on your money by investing in property, there are a few different ways to calculate returns but it can get complicated.

Without overcomplicating it, the two main ones are: Yield and R.O.C.E. Return on Capital Employed (how much money you put into the property).

Here’s a rough, quick way to work out the Gross Rental Yield:

(Annual rent/ property value X 100)

Eg: Monthly rent: £500

Annual Rent: £6,000

Property value: £100,000

£6,000 / £100,000 X 100 = 6% Rental yield

What is a good yield?

If the yield from the property is higher than the interest rate you’re getting from your bank, you’re winning!

Then you can work out what to look for. Roughly speaking, If you have a deposit of £25,000 and you can get a mortgage for £75,000 then you can get a property for £100,000 assuming it doesn’t need a refurb. Don’t forget you will have mortgage fees, survey fees, solicitors fees on top of that as well.

How much will a £100,000 house rent for? Do your research. It’s easy enough to find these on Rightmove and Zoopla etc. Which areas do you need to look in where can you get a property for that price?

Or if you’re looking for a house that needs a refurb, how much will the refurb cost, how much would you have left for the deposit and other buying costs? With that much deposit, how big a mortgage can you get. With Buy to Let mortgages, you generally need at least 25% of the purchase price. Then you know what your budget is and where to look for properties.

Now you know how to analyse property deal … You just need to find a property that fits in with that criteria.

Simple enough right? There is obviously more to it than that … but this is a simplified, rough guide to how to analyse a property deal if you’re new to investing. Property investing can seem daunting if you are unfamiliar with the terminology or don’t know what to look for, but plenty of ordinary working people buy rental properties every week and benefit from higher returns than they were getting from the bank.

If you need any help finding the right property… don’t hesitate to contact us anytime.

Happy investing!