How I Evaluate Real Estate Purchases

Hi Learner,

My fiancee and I have been keeping our eyes on properties that are coming on the market that we could live in after we get married.

I spend at least 5 hours a week looking through properties so I wanted to document the tools and methods I use to evaluate deals.

The ideal criteria for any property we find:

• 2 bedroom, 2 bath

• Under $2,500/month for the mortgage + HOA/condo fees

• Close to my family and easily accessible to major highways that lead to Maryland.

• Can be rented out close to the monthly payment or sell for a profit after 2-3 years of living in the property. (Note: There are a lot of factors that go into making a “profit” on the sale of a home. I’ll save that breakdown for another day.)

STEP 1: Find properties that we can afford monthly.

As stated earlier, we’re trying to keep our monthly payments (including taxes, HOA/condo, and insurance) under $2,5000/month.

Zillow and Redfin recently launched the ability to filter listings by monthly payment.

Click on the “Customize” dropdown to enter the information according to your specific criteria.

You can enter the interest rate that you get from your lender during the pre-approval process and then enter either a percentage or the amount of money you can realistically put down.

With interest rates so high, there were actually no properties at this exact moment that matched the limits I set here so I raised the monthly limit to $2,750 for the sake of this exercise.

STEP 2: Research what price similar properties sold for.

So now I’ve found a nice 2 bedroom 2 bath condo near Reston Town Center (a nice area of Virginia with things to do + businesses and Metro nearby.)

Let’s see what similar properties in this neighborhood go for.

I zoom in close on the property and then change the search from “For Sale” to “Sold” and then filter to see any properties sold within the last 2 years.

After looking through the properties in the same neighborhood, it looks like properties generally go for about $320k - $340k here. Seems like the $335k asking price is reasonable.

But it also appears that there might not be much room for rapid price appreciation within the next 2-3 years.

So I would want to see how this unit could perform as a rental.

STEP 3: Research what rental rates in the neighborhood are.

This is where I get a bit creative.

Zillow does a good job of collecting real rental listings (as opposed to the Zestimate which can not be trusted!!!). You can find those listings easily by searching this query:

[Street Name], [City, State] “Listed for rent” zillow [sqft]

It will return listings on Zillow that have been listed for rent in that neighborhood. For example:

Looking through the listings, I see that a $2,000-2,200 rent is realistic.

That’s a little too low compared to our expected monthly payment ($2,600 per month). Plus, as we saw in the last section, there might not be enough appreciation by the time we want to sell. So this doesn’t look like a good buy for us.

A Real Example + Closing Thoughts on the Market

With rates around 7%, I know it seems like there’s no hope in buying any property - much less one that works out as a “deal”.

But I want to show you a property we looked at last week that could’ve been near break-even, even in today’s market.

We found a 2 bedroom 2 bath condo in a lower-income part of Reston that would have been around $2,200 a month all-in.

After doing the rent analysis from step 3, I saw that this exact same unit had actually been rented recently for $2,000/month. Plus all utilities were included in the HOA/condo fees (meaning less maintenance for the furnace and water heater too).

Also, if the interest rate dropped back down to even 5%, we could refinance and hypothetically profit each month.

We ultimately chose not to make an offer because of the location and area. But it just goes to show that deals are available if you keep looking!

Finally, I want to make a note that after doing your own analysis, you should:

1. Ask your real estate agent to get rental listings in that area

2. Ask your lender to provide you a more accurate breakdown of the monthly payment and how much cash you need to close. (Redfin and Zillow don’t show or include the 3% that you’ll likely need for closing costs.)

Did you enjoy this type of deep dive? Would love to hear your feedback.

Cheers and happy applying,
Aswin