3 Real Estate Analysis Mistakes To Avoid

By Author: James Kobzeff
Total Articles: 44
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Strange as it may seem, there are times when you should avoid using the "real" numbers in a real estate analysis. Discover what these numbers are and how you should enter them in your next real estate analysis.

Working with real estate investment property, I've been in the position over the years to see hundreds of APODs, Proformas, and Marketing Packages created by colleagues for promoting their income property listings.

Presentations are sometimes top-notch, but it's also common to see a string of mistakes made in those real estate analysis presentations as well (especially by investment property novices). In this article, we will look at three of the most common mistakes and consider how to correct them. Before we do, however, we should understand why a correction is crucial.

Bear in mind that real estate investing requires accurate income and operating expense numbers to make prudent real estate investment decisions. In some cases, it's just a matter of showing current figures in the real estate analysis, such as current rents or current property tax, for example. In this case, the "real" ...
... number is what it is, and the real estate investor would want the bottom line to reflect that number.

In other cases, though, the "real" number is not the number to include in the real estate analysis. Strange as it might seem, some numbers used in a real estate analysis, if "real", can actually skew the bottom line and create distorted returns.

Okay, let's look. Here are three of those numbers.

1) Vacancy rate - the tendency for many is to show a vacancy rate based on the past performance of the rental property-sometimes even at zero percent! This is not realistic, however, because market conditions, property wear and tear, rent increases, and even a change of ownership can (and often do) cause vacancies. It is always prudent in real estate investment analysis, therefore, to include an allowance for vacancies characteristic to the local market.

2) Maintenance and repairs - it is a mistake to show the amount actually spent over the past several years for maintenance and repairs. It is helpful for a real estate investor to know what an owner has done to upkeep the property, but past expenditures are not necessarily relevant to what a new owner might spend in the future. The current owner, for example, might be a repairperson capable of keeping maintenance and repair costs reduced, whereas the new owner might be required to contract it all out at top dollar.

3) Replacement reserves - most tend to ignore this altogether because reserves for replacements are not a fixed reoccurring expenditure like property taxes, utilities, or trash. It is, however, wise to include an allowance for reserves in a real estate analysis because it provides for future replacement of worn out items an owner must eventually pay for, and therefore it's best that an investor plan ahead to spend it.

A local real estate appraiser or real estate agent who understands rental property can advise you concerning these numbers. Here's what you want to know. (1) Typical vacancy rates in the area for whatever-type property you want to analyze; (2) Typical percentage used to estimate maintenance and repairs (you should get one percentage for brand new or newer units and another percentage for older units); (3) The dollar amount per unit per year to include for replacement reserves.

Don't hesitate to call and ask them. If you are serious about working with real estate investment property, and want to present a real estate analysis with the most appropriate numbers and returns, it's imperative that you avoid these rookie mistakes.

Here's to your real estate investing success.
James Kobzeff is the developer of ProAPOD - leading real estate investor software solutions since 2000. Create a rental property cash flow, rate of return, and profitability analysis in minutes! Go to => www.proapod.com