How Does Real Estate Investor Software Help in Analyzing Rental Properties?

Introduction

Investing in rental properties can be a very profitable venture, but it requires careful analysis to become profitable and keep risks to a minimum. So, how can you use real estate investor software to analyze your rental properties to maximize your investment returns?

Comprehensive financial analysis

Let’s start with good old-fashioned financial analysis. Accurate financial analysis is one of the top benefits of real estate investor software. It is a lot easier to find and understand the potential of a real estate investment and its returns when the software does the calculations for you. There are three types of financial analysis you’ll want from your investor software to help you make better decisions when buying a rental property.

Cash flow analysis: this helps you calculate things like your rental income by looking at occupancy rates, rent prices, and lease terms. It also tracks all associated expenses, including property management fees, repair and maintenance costs, leasing fees, HOA fees, insurance, property taxes, loan fees, utilities, and other operating expenses These first two subsets lead into the third part of cash flow analysis, providing a clear picture of the net cash flow, and helping you fully visualize expected profits over the first five years of the investment, detailing down to monthly increments. 

Return on investment:  In the world of real estate investing, ROI correlates to the percentage of profit earned from a property relative to its cost. Real estate investor software helps you analyze the total initial investment, including purchase price, closing costs, and any renovation expenses. Once you have that, you can quickly see your ROI because any software will automatically consider all these factors and compare the net income to the initial investment to provide an accurate ROI. And with that, you can determine profitability.

Cap rate calculation: Taking it a step further, your software will reveal your Net Operating Income (NOI) and using that, your Cap Rate Formula. As you may know, the capitalization rate is a primary metric for assessing the potential return on a rental property, and a whole lot easier to calculate with software than with pen and paper. You can take it further, software like Privy allows you to do research on properties based on cap rate parameters. You can define a specific cap rate, and then search in a particular neighborhood, or even look at the entire country, to see what will yield those returns. 

Market comparisons and valuation

Real estate investor software enables investors to conduct comparative market analysis (CMA). This is part of the development process to create accurate property valuations. There are two main facets to this process.

Comparative market analysis (CMA): By analyzing comparable rental properties in the market and considering factors such as size, location, and amenities, you’ll get insights into comparable local market trends, including average rent prices, vacancy rates, and property appreciation rates. You can then make pricing recommendations, helping you set rental rates that are both competitive and profitable.

Property valuation: Certain software packages let you analyze prospective real estate deals and offer Automated Valuation Models (AVMs). Especially handy with rental properties, AVMs estimate property values based on historical data, recent sales, and other market factors. This results in accurate valuations, so you never overpay for properties and ensure your investment decisions are data-driven and well-informed.

Risk assessment and management

If you want to see the cleanest profits and mitigate them appropriately, there are three main factors for managing rental property risk with real estate investor software.

Vacancy risk: you want your software to analyze historical occupancy rates and trends in the area. This helps you gauge the likelihood of maintaining high occupancy levels and directly lends to your profitability calculations. Part of this is a demand analysis, which evaluates the demand for rental properties in the market. This provides insights into potential vacancy risks and vacancy rates.

Expense management: with expense management, you’ll be able to project future expenses, so you can budget appropriately. This makes it easier to predict unexpected expenses that may fall outside your general budget, such as emergency repairs and sudden vacancies. 

Financial ratios: To assess your risks effectively, most software will calculate your Debt Service Coverage Ratio (DSCR) and Loan-to-Value Ratio (LTV). These ratios help you ensure you can cover your debt payments and indicate the amount of financing relative to your property’s value.

Scenario analysis and forecasting

Finally, real estate investor software provides tools for scenario analysis and forecasting. This allows users to analyze multiple potential outcomes to find the most profitable route with the least amount of risk. 

Scenario analysis: this type of analysis allows you to model different what-if scenarios, such as changes in rent prices, occupancy rates, or expenses. It also provides an impact assessment so you can see how each scenario affects your cash flow, ROI, and overall profitability. So no matter the market conditions, you’re totally prepared. 

Long-term forecasting: looking to the future when it comes to managing rental properties is integral to profitability. Real estate investor software will use historical data and market trends to forecast long-term property performance, including appreciation rates and future rental income. This helps you fully understand any potential long-term returns, and build a solid long-term strategic plan.