Real Estate Investing Basics

How to Crunch Real Estate Numbers Painlessly Using This One Simple Rule

Expertise: Real Estate Investing Basics, Personal Development, Landlording & Rental Properties, Real Estate News & Commentary, Business Management, Flipping Houses, Real Estate Deal Analysis & Advice, Personal Finance, Real Estate Marketing
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On many occasions I have taken time to read through the forums. More often than not, the conversations are specifically about the numbers. Although the majority of what I write and what I teach has to do with communication and building trust and relationships, the business is ultimately run by these same numbers members keep asking about.

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I have had other individuals recently inbox me concerning the 50% rule and the 2% rule, and honestly, I have been in Real Estate for most of my life and have still not figured those out! What I do live by though is a very, in my opinion, simple formula that I refer to as the "Engelo Rule."

Related: Real Estate Investing: a Numbers Game

Haha, just kidding — you may call it whatever you wish; just know that it works.

As always I strive to do everything possible to keep the numbers simple. The more complex you make something, the less clear it becomes.

This is How I Do My Estimates

For example: The purchase price of the property is $50,000, and it rents for $1,000pm.
(What an AWESOME find!)

$1,000 monthly rent x 12months = $12,000pa

The expenses would include 10% property management ($1,200pa), annual taxes of $1,000pa and annual insurance of $600pa.

$12,000 rent per year – $2,800 yearly expenses (PM, Taxes, Insurance) = $9,200pa

I would also always add a margin of safety and deduction, which would be dependent on the class/area. The average is to take off a further 10% for “unexpected maintenance and vacancy.”

So $9,200 – $920 (10%) = NET $8,280 yearly cashflow

Once you have the NET cashflow figure, this figure is then divided with the purchase price of $50,000 and then you will get a sum of 0.1656 which would mean a NET CAP of 16.5%.

Also, please keep in mind that the above calculation is used when the purchase is made with cash only. A few minor adjustments would be needed when using finance, but to keep things simple I have decided to leave those estimates out.

Related: The Importance of Knowing Your Numbers in Real Estate

Conclusion

As always, researching your market by talking to trusted partners on the ground allows you to know firsthand what a good rental figure would be and if there are any more hidden costs associated with the city or the property management used.

This is not one of my longest blogs or the most profound, but I live by this simple formula when crunching the numbers on all of my deals.

How do you crunch your numbers? Will you use my formula in the future?

I truly appreciate your time, and feel free to comment below.

Engelo Rumora, a.k.a."the Real Estate Dingo," quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate al...
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    Brandon Turner
    Replied over 5 years ago
    Hey Engelo, Great breakdown of how simple it can be to calculate potential returns. Although, at least in my area, 10% for repairs AND vacancies is pretty low. I usually plan at least 20% for these items, but my properties are older. Thanks for the post!
    Engelo Rumora
    Replied over 5 years ago
    Hi Brandon, Thanks for your comment. The 10% margin of safety can always be tweaked anyway the investor feels fit. Some factors to consider are: age of property (as you mentioned), class of area, class of tenant, property management used and proximity to the property. Many investors that invest close to home can do the minor fixes themselves and save few % points. I always suggest overestimating expenses and underestimating income. If the numbers still look good and make sense, then you might be onto a winner. Thanks and have a great day.
    stephen
    Replied over 5 years ago
    OK – so 16.5 is a number you would find acceptable? So what cap rate number would you consider too low to be worthwhile? stephen ———— Reply Report comment
    stephen
    Replied over 5 years ago
    OK – so 16.5 is a number you would find acceptable? So what cap rate number would you consider too low to be worthwhile? stephen ————
    Engelo Rumora
    Replied over 5 years ago
    Hi Stephen, Thanks for your comment. The deal mentioned in the blog was just an example. If buying turnkey properties I believe you will find these figures to be the average in the Midwest. A Class – 8-10% B Class – 13-15% C Class – 18-20% I hope that helps. Thanks and have a great day.
    Curt Smith
    Replied over 5 years ago
    Also correspondingly the expense ratio used to calc NOI for A,B,C is: A expense ratio: 30% or so. B 40-50% C 50%-60% So the NOI for the example given above if it’s a typical B property, 40% expense ratio, or being conservative 50% expenses (includes roofs, new AC units, rehabbing after 5 yrs with new floors, appliances etc adds up to an easy 50% expense ratio). 1000 x 12 x .5 = $6k NOI 6k/50k = 12% cap rate.
    Lin
    Replied over 5 years ago
    I did the math,… and my new built purchase has a NET CAP of 5.39%. I have no idea if that is good or bad. All I know is that the rent covers my fixed expenses. This is the Central Coast of California. Anything left will be sucked up by IRS and CA Taxes. Engelo, please confirm what CAP RATE range are we looking for?
    Dave
    Replied over 5 years ago
    you are looking for the cap rate that gets you your desired goals. Where I live in tampa, I can go for much lower cap rates but in great neighborhood with high long term potential for appreciaton or I can go to lower quality neighborhoods and get huge cap rates but minimal opportunity for appreciation. it all depends on what you are looking for.
    Engelo Rumora
    Replied over 5 years ago
    Hi Dave, Thanks for your comment. As you mentioned, every property should be purchased with the end goal in mind. I am building my portfolio with only B class properties. Lower cap rates but great exit strategies and potential for capital growth if it ever occurs. Once I have between 15-20 properties and ZERO debt, I will consider buying lower end homes with higher potential cap rates. Thanks and have a great day.
    Engelo Rumora
    Replied over 5 years ago
    Hi Lin, Thanks for your comment. The cap rates on the East and West Coast of the US tend to be much lower than the Midwest for example. History has shown they offer much better growth tho. I base my decisions on the numbers in the deal and not speculation of capital appreciation. In my opinion very good NET CAP is around 15%. Having feet on the ground and doing the work yourself can make those numbers even better. I just bought an A class property for my personal porftolio that is showing a 20% NET CAP. Once renovations are completed, I will also have a $30,000 equity gain. Thanks and have a great day.
    Dave
    Replied over 5 years ago
    you are looking for the cap rate that gets you your desired goals. Where I live in tampa, I can go for much lower cap rates but in great neighborhood with high long term potential for appreciaton or I can go to lower quality neighborhoods and get huge cap rates but minimal opportunity for appreciation. it all depends on what you are looking for. Reply Report comment
    Dave
    Replied over 5 years ago
    you are looking for the cap rate that gets you your desired goals. Where I live in tampa, I can go for much lower cap rates but in great neighborhood with high long term potential for appreciaton or I can go to lower quality neighborhoods and get huge cap rates but minimal opportunity for appreciation. it all depends on what you are looking for.
    Lin
    Replied over 5 years ago
    Thank you for the response, Dave. I like this KISS returns system, Engelo. I am 74 y.o. and I just got a fixed 30 loan with this new build. I found the costs for new build, and loan fees are heavy, compared to the short sales and foreclosures , previously purchased for cash. I enjoy Real Estate, and consider Shelter , a basic need of Mankind.
    Engelo Rumora
    Replied over 5 years ago
    Thanks Lin, I always try to keep everything at KISS lol I have been involved in hundreds of Real Estate transactions over the years and have never decided to take on a development project. I see it as higher risk due to many things being out of the investors hands. Very decent profits can be made on the foreclosure deals as you mentioned. A mentor of mine does between 2-15 retail flips to home owners per month. His minimum profit is $40,000 per deal. I think those numbers speak for themselves. Most require cosmetic rehabs without involving the city on any plan approvals, etc…. Thanks and have a great day.
    Raj
    Replied over 5 years ago
    Great article. I will try to keep this calculation method for my next rental purchase. I used to do the rough estimate of mortgage taxes ins and vacancy etc to get approx total cost. These calculations are very good when you have to decide quickly on purchasing the property on approx what the cash flow can be. Great article once again thanks for helping with one more quick tool to analyze the rental deal. Have a great day Sir
    Engelo Rumora
    Replied over 5 years ago
    Hi Raj, Thanks for your comment. Always discount a few extra % points in your margin of safety and you shouldn’t have a problem. Have a great day.
    Engelo Rumora
    Replied over 5 years ago
    Hi Raj, Thanks for your comment. Always discount a few extra % points in your margin of safety and you shouldn’t have a problem. Have a great day.
    Linda M. Investor from Atlanta, Georgia
    Replied over 5 years ago
    This article is short and to the point. Thanks for sharing. Linda
    Engelo Rumora Specialist from Toledo, OH
    Replied over 5 years ago
    Thanks Linda, I am glad you liked it 😉 Have a great day.
    Ayodeji Kuponiyi Investor from King of Prussia, Pennsylvania
    Replied over 5 years ago
    Great post Engelo! I try to keep crunching numbers easy & painless but I find myself lost/stuck trying to figure out the mortgage payments or payments to seller (if we agreed upon a seller financing) as well as figuring out all the taxes (property, school, county/borough). Zillow shows property taxes but not the total sum of all the taxes. It gets frustating.
    Engelo Rumora Specialist from Toledo, OH
    Replied over 5 years ago
    Hi Ayodeji, Thanks for your comment. You should be able to get all those figures on the count website. Here in Ohio, its quite simple. Also, you can just ask the lender for the annual lump sum loan amount. Then just deduct both from the existing “net” cashflow figure. Thanks and have a great day.
    Ayodeji Kuponiyi Investor from King of Prussia, Pennsylvania
    Replied over 5 years ago
    Ok I wasn’t able to find the school tax info but I’ll reach out to the the county office for the numbers. Thanks. I was just hoping to get the info I needed online as oppose to be on hold over the phone. I’m looking to buy and hold turn key multifamily houses. Any advice?
    Engelo Rumora Specialist from Toledo, OH
    Replied over 5 years ago
    Ok cool, Yep 🙂 Feel free to shoot me an email – [email protected] I would be happy to find out more about what you’re looking for and assist in anyway. Thanks
    Ayodeji Kuponiyi Investor from King of Prussia, Pennsylvania
    Replied over 5 years ago
    Thanks Engelo, I just sent you an email.
    Brad
    Replied about 5 years ago
    Hi Engelo. Thanks for this short & sweet article. I’d be interested in knowing the few minor adjustments that would be needed if finance were used. I came across a post of yours on Linkedin (I follow the Real Estate topic), where you linked in this article. Thanks again.
    Engelo Rumora Specialist from Toledo, OH
    Replied about 5 years ago
    Thanks Brad, Feel free to email me at [email protected] Happy to help. Have a great day.
    Mario Mormile Investor/ Real Estate Agent from Burton, Ohio
    Replied almost 5 years ago
    Great article, Engelo. Running the numbers properly is crucial in knowing if you have a great deal on your hands or not. Keeping it simple is always my goal as well. Thanks!
    Alex Sanfilippo from Jacksonville, FL
    Replied over 4 years ago
    “Keep it simple” is one of the rules that I live by in life… This simple math and evaluation of a property is perfect. I appreciate it, Engelo!
    Engelo Rumora Specialist from Toledo, OH
    Replied over 4 years ago
    Thanks mate, Have a great weekend.
    Kayla Lyon from Oceanside, CA
    Replied over 4 years ago
    I love the simplicity! Thanks for breaking it down so simply, makes it much less intimidating for newbies such as myself 🙂
    Engelo Rumora Specialist from Toledo, OH
    Replied over 4 years ago
    My pleasure Kayla, Much success and keep the dream alive 🙂
    Casey Murray Investor from San Diego, CA
    Replied over 4 years ago
    Everything is much better when put in layman’s terms! Great article, Engelo.
    Engelo Rumora Specialist from Toledo, OH
    Replied over 4 years ago
    Thanks mate, I try to make things simple with everything except my clothing. The more blue, yellow and other crazy colors, the better hahaha Have a great day 🙂