Real Estate Investing Math Pop Quiz: Test Your skills!
If you’re like me, the thought of doing math makes me cringe. Doing algebra nearly doubles me over in pain. But, I love real estate and all the analytics that go with it. After all, a house is just a house until you run the numbers enough to know it’s a deal, right? The nerd in me really gets excited when the figures and calculations point toward “Profit!” (Pass the pocket protector, please!)
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So, let’s check in on your inner nerd. Here’s a pop quiz to see where you’re at on some RE Math. Don’t be scared! Grab a pencil and paper and see how many you can get correct (without peeking at the answers!)
Question #1) The Hard Money Lender – How Much Do You Need?
You just found a pre-foreclosure but the seller wants out, and FAST. The comps make sense, and you can offer $145,000 and still make a decent amount after you resell the property.
But, you don't have all the funds to pay the purchase price in full. So, you call your local hard money lender and they think your purchase price makes sense as well. They can fund you up to 80% of your purchase price, but it looks like you'll still have to come in with closing costs and HM fees. They charge 2% upfront on their loan amount. Plus your taxes, title and insurance fees are going to run you 3.5% of the purchase price.
How much money do you have to come in out of pocket?
Let's start by looking at the HM (hard money) loan. Take 80% of your purchase price (.8*145,000) = $116,000
The HM lender also charges 2 points upfront of the loan amount. So calculate (.02*116,000) = $2,320
Now, taxes, title, and other charges are 3.5% of the total purchase price, which looks like (.035*145,000)= $5,075
So your final calculation would look like $145,000 â $116,000 (HM loan) = $29,000 down payment+ $5,075 closing costs + $2,320 HM fees= $36,395
The Answer: You’d have to bring in funds for $36,395 to close the deal.
#2) Which Lender is Better
Hard money lenders are out there, ready to fund your solid deals. Although their particulars might seem very close, paying attention to fees, minimum interest due, and points can save or cost you hundreds, if not thousands.
Let's use the same scenario as before. You pick up a pre-foreclosure and need a HM loan. The lender at .80 of purchase price with 2 points upfront seems like a good deal.
But, you saw a Hard Money Lender List on BiggerPockets and thought to reach out to some other people in your area, to shop rates.
John the Lender researches your deal and agrees your purchase price looks good. His terms are 80% of the purchase price at 16% interest, with a 2 points and one months interest minimum (let’s say Lender #1 does not have a minimum). You already have another buyer lined up who plans to close 22 days from your acquisition date (and actually does close).
Which HM lender has the better deal for this scenario?
We already calculated out the first HM loan, which will cost you $2,320 in upfront points.
If he/she is charging 18% interest, you’d break down your per diem (daily cost) like this
116,000 * .18 = $20,880
This is the total cost of interest on the loan. However, HM loans are meant for short term, hence the high interest rates.
So, let’s divide the total figure by 12 months
20,880/12 = $1,740
This is what your monthly loan payment will be. Let's break it down further by diving each month into days
1,740 / 30 = $58
So, it’s costing you $58 every day you hold this house. If you hold it for 22 days, the cost is $1,276.00
Lender 1 costs you $2,320 in fees plus $1,276.00 in interest for a total of $3,596.00
Now, we’ll do the same for Lender 2, but a little quicker.
116,000*.16 = 18,560/12 = $1,546.66/30 = $51.55
2 points = $2,320
1 months minimum interest = $1,546.66
Total = $3,866.66
The Answer: So, even though Lender 2 had a lower interest rate, you are still saving money by using Lender #1, for a difference of about $270.00. Lender one is the better deal for this scenario.
#3) How Much Did He Pay?
You and your buddy are at a BBQ and he’s bragging about this killer deal he just closed on. He doesn’t share all his numbers but he says “Dude, I just sold this place for $140,320, and cleared a 25% profit. Isn’t that like, a stellar spread?!”
You, being a curious investor, want to know what he got it for. (Tax records don’t show it yet and he won’t spill the beans.)
What did he pay for the property? Here’s how to run those figures:
Remember, appreciation is an increase in value from any cause. A profit it based on what you pay for something (purchase price), NOT what you sell it for.
Write down the %’s you know and the figure missing %. (Purchase price is 100%; profit is 25% so sales price is 125%)
Sales price (including profit) 125% $140,320
Plus profit 25%
Purchase price 100% ??
Next, write down the $140,320 figure on the sales price line.
Divide the sales price figure by the ($140,320) by the % on the same line (125%) and it will give the $$ figure on the 100% line ($140,320 / 1.25 = $112,256)
The Answer:So, your buddy got the house for $112,256.
Whew, you’re done with the pop quiz! I know you are saying, but Tracy, I can plug figures into my excel sheet or fancy software and they do all this for me. Be that as it may, it’s still important to understand HOW things are broken down. (this sounds like the ghosts of Math Teachers Past!)
So, how did you do? Does this type of fact-figuring come second nature to you or was this an introduction?
Photo: Mikey Angels