These Analysis Methods Are Applicable to Any Real Estate Asset—And They Are Highly Effective

Real estate spans an array of property types, spanning multifamily residences to industrial spaces and hotels – but its fundamental principles remain the same. At its heart, real estate analysis revolves around comparing an object’s valuation after completion against its cost; any difference represents your potential profit.

Here, we will review the key steps of real estate analysis: cost evaluation, valuation determination and sensitivity analysis. These methods apply universally, regardless of which property type is being considered.

Total Cost Analysis A complete cost analysis goes well beyond simply looking at the purchase price of real estate investment properties; it includes an assessment of all associated expenses including those listed here:

Purchase Price: The purchase price covers both the land or building as well as any associated closing costs.
Financing costs (if applicable): These costs come into play when financing is necessary for your transaction, which could come in various forms such as construction financing, bridge financing or permanent financing (not applicable in an all-cash transaction).
Hard costs: These expenses encompass all construction-related expenses, whether that involves renovations or building from the ground up.
Soft costs: Soft costs refer to any fees related to architectural design costs or permit expenses such as building permits.
Holding Costs: Prior to becoming operational, there are ongoing expenses to take into account even though your property isn’t producing income yet – such as property taxes, insurance costs and any fees payable during its holding period.
Financial monitoring of expenses is vital in order to secure the feasibility of an investment. Seasoned investors may draw on historical cost data to estimate expenses more accurately; those venturing into real estate for the first time may experience more of a learning curve; nevertheless, cost analysis remains accessible even to novice investors.

Consider these steps for a comprehensive cost analysis:

Estimating Financing and Soft Costs
Estimating Financing and Soft Costs is usually straightforward. Banks or debt funds can help evaluate preliminary financing costs while consulting an architect can assess any soft costs that might exist. On average, this total typically amounts to 15%-20% of hard costs.

Estimating Hard Costs Accurately estimating hard costs is made more complex due to general contractor (GC) variability; to address this challenge effectively it’s wise to hire one with experience in projects similar to your undertaking.

Projects with similar dimensions, quality standards, material choices (concrete/wood), and parking specifications can be evaluated using a cost per square foot ($/SF) metric to gain an approximate idea of hard costs. In cases where architectural plans are available for review by your GC can provide for an in-depth and precise cost evaluation process.

By following these strategies, cost estimation becomes easier – whether you are an experienced investor with decades of historical data at hand or newcomer launching their first real estate endeavor.