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Real Estate Investing Basics

Introduction to Real Estate Investment Analysis

J Scott
Expertise: Real Estate Investing Basics, Real Estate News & Commentary, Flipping Houses, Mortgages & Creative Financing
36 Articles Written
Portrait of attractive hardworking businesswoman with Afro hairstyle busy doing paperwork at office desk, working through finances, using calculator and making notes in her notebook with pen

Let me ask you a question: How long do you spend picking out clothes each morning? Probably longer than most investors spend doing the math for real estate investment analysis. Unfortunately, people choose the deals based on intuition, not analytics.

Ugh. Please, people!

Digging into the details of deal analysis might feel like a trip to jargon-town. Cap rate? NOI? Cash-on-cash return? Total return?

Feel bewildered? You’re not alone. We get a lot of posts on the BiggerPockets Forums asking about analysis. Oftentimes, the posters have a reasonable understanding of the basic building blocks of a financial analysis—but all-too-often, I find myself reiterating some basic concepts.

Before diving into real estate investing, make sure you understand how to compare markets and properties. Whether you’re trying to decide between investing in Boise or Sacramento—or you’re just comparing two similar homes—this guide will walk you through all the numbers you need to know. From calculating cash-on-cash return to running a comparative market analysis, the experts at BiggerPockets demonstrate the steps you need to follow and the statistics you must know with The Beginner’s Guide to Real Estate Market Analysis.

Different-sized properties require more or less analysis, but consider this guide your 101-level primer to analyzing any multi-unit residential property—from two-unit duplexes to 500-unit complexes. This analysis even works for single-family rentals, but keep in mind that the market value for single-family homes is determined differently than for multifamily properties.

Related: 3 Rules of Thumb to Size Up Deals Quickly (& Land Properties Before Anyone Else!)

Determining the Value of Your Real Estate Investment

Like I said, different properties are valued differently. Assessing a triplex the same way one might evaluate a single-family home leads to a wildly skewed value. Here’s what you need to know.

Single-Family Homes

Market “comps” determine the value of single-family homes, investment or not. These comps—or “comparables”—are nearby properties with similar characteristics. They share variables like floorplan, number of bedrooms and bathrooms, garage size, and amenities. A single-family investment home generally rises in value if a similar home is also rising in value—and vice versa.

Multi-Unit Properties

Larger investment properties—those with at least two units, and especially those with more than four—are priced and valued differently. The value equates directly to how much income or profit the property produces. It’s possible that an apartment building in a neighborhood where house prices are dropping could, in fact, increase in value.

You can’t just compare your apartment building to others down the street to see how much it’s worth. That’s why real estate investment analysis is so important.

There are several primary factors to consider, but cash flow and appreciation are the two most important variables. Cash flow is simply the money left after all the bills have been paid, and appreciation is the equity gained as the property value increases.

There are not a lot of great ways to estimate future appreciation without a crystal ball, so I generally choose to focus on the cash flow.

Learn More: Check out BiggerPockets’s investment calculators to analyze cash flow, ROI, and more.

Gathering Your Information

Good financial analysis involves inputting a bunch of information into a financial model and using its calculations to determine whether the investment is good or bad—and right for you. Know these variables for the most thorough financial analysis of a residential rental property:

  • Property details: Number of units, square footage, utility metering design, etc.
  • Purchase information: Total purchase expenses—or purchase price plus rehab or improvement costs
  • Financing details: Mortgage or loan information, such as the total loan amount, down payment, interest rate, and closing costs
  • Income: Rent payments and any other income the property produces
  • Expenses: Maintenance costs, including property taxes, insurance, and maintenance

Pro-Forma vs. Actual Data

Getting good data from your model requires reliable, accurate information. Remember: It’s in the seller’s best interest to provide appealing—not accurate—numbers. For example, they may provide high rental income estimates or neglect to mention certain maintenance expenses. Part of the investor’s job is ensuring you have the best available information.

“Pro-forma”—or estimated—data from the seller merely kick off the discussion. Before closing,  determine the actual numbers. Ask to see previous years’ tax returns, property tax bills, and maintenance records. Hopefully, the actual data is similar to the pro-forma data—but don’t be surprised if it’s different.

Check for potential surprise, too. For example, when was the last time the property was assessed for taxes? If it was a while ago, and values have increased significantly, it’s possible that the property will soon be reassessed and taxes will increase. Even small changes to the income and expense numbers can mean big changes in your bottom line.

Where to Find Data

Not sure where to track down the necessary information? Start here.

  • Property details should be available from the seller. Check with your local records office for more comprehensive, detailed information.
  • Purchase information includes any upfront maintenance or improvement work that must be completed before the property can meet its income potential. Have the property inspected to ensure that there are no hidden issues or problems.
  • Financing details can be provided by your lender or mortgage broker.
  • Income details come directly from the seller—but don’t rely on pro-forma data. You can also talk to the property management company currently handling the property, if one exists, for this information
  • Expenses should also come directly from the seller or property management company. A building inspector can warn you about any major repairs that may come due, such as a new roof or HVAC system.

Oh yeah—hey you! To accompany this blog post, I created a free PDF poster you can download right now and print out. It’s called “The 10 Biggest Mistakes Investors Make When Analyzing Rental Properties” and will help you avoid the mistakes that so many investors make when analyzing deals. Don’t buy a bad deal!

Elements of Real Estate Investment Analysis

The best way to teach real estate investment analysis is with numbers. Let’s take a sample property—1950 Maybury Avenue. Here are the stats you’ll need to know:

Units: Eight, with seven rented and one vacant, and needing $10,000 in repairs

  • Four 1-bed/1-bath units, rented for $525
  • Two 1-bed/1-bath units, rented for $550
  • Two 2-bed/1-bath units, rented for $650

Price: $400,000
Cap rate: 9%
Gross income: $54,000
Other income: $2,400 from laundry
Vacancy rate: 12%
Taxes: $4,000
Insurance: $600
Maintenance: $3,000
Advertising: $300
Utilities: $2,000
Net operating income: $37,169

calculations for rental property

Calculating Net Operating Income

One of the cornerstone metrics of your financial analysis is “net operating income” (NOI). This determines the total income the property generates after all expenses, not including debt service costs—or your loan costs.

In mathematical terms, NOI equals the total income of the property minus the total expenses of the property:

NOI = Income – Expenses 

Typically, NOI is calculated monthly using income and expense data, which can be easily converted to annual data simply by multiplying by 12.

Assessing Property Income

Gross income is the total income generated from the property, including tenant rent and other income from things like laundry facilities and parking fees. 1950 Maybury, for example, has eight units renting for between $525 and $650 per month, for a total of $4,500 per month. In addition, we have $2,400 per year in additional laundry facility income. That means total monthly income is $4,700, and annual income is $54,000.

Most of a property’s income generally derives from tenant rent—making it extra important to account for unit vacancy. Most areas have an average vacancy rate, although your property’s specific vacancy rate may be higher or lower. If so, you’ll want to factor that into your analysis.

Here are questions to ask if the vacancy rate doesn’t correlate with the average local vacancy:

  • Is the data pro-forma or actual? If it’s actual, what is the current management doing to keep the building filled?
  • Is the rent lower than market rents?
  • When do current leases expire?

You’ll need to determine what you think is a reasonable vacancy rate going forward—I recommend erring on the conservative side.

When determining how much income you can expect, start by subtracting the income that you likely won’t see due to vacancy. In our example property, only one out of eight units is vacant, equating to about 12 percent vacancy. We’ll use that number for our analysis.

So, our total monthly income would be $4,160, with a total annual income of $49,920.

rental property revenue

Assessing Expenses

Now let’s calculate our total expenses for this property. In general, expenses break down into the following items:

  • Property taxes
  • Insurance
  • Maintenance—estimated based on the age and condition of property
  • Management, if you employ a professional property manager
  • Advertising
  • Landscaping, if you hire a professional landscaping company
  • Utilities, assuming any portion of the utilities is paid by the owner

Convert any monthly expenses to their annual costs to find the property’s annual operating cost.

Common Expenses

Every property owner will encounter these common expenses—so it’s important to learn how to estimate the cost.

  • Repairs: Repairs are difficult to estimate because there are a lot of variables that come into play. When estimating potential repair cost, look at the property itself. Generally, you can assume between 5-15% of the rent, depending on the condition and age of the property. And keep in mind that you may go six months without a single repair and then get hit with a $1,500 water leak. You just never know.
  • Capital expenditures: Also known as "CapEx," this means those expensive big-ticket items that need to be replaced every so often, such as roofs, appliances, and HVAC systems. For each major system, estimate the cost to repair, divided by the remaining lifespan, and set aside that amount every month.
  • Property management: Property management companies typically charge a percentage of the rent, along with a fee to rent out a unit. These numbers can change based on your local area, but in my area, property managers charge 10% of the rent and 50% of the first month’s rent when a unit is turned over.

expenses for rental property

Related: How to Accurately Estimate Expenses on a Rental Property in 3 Easy Steps

Calculating NOI

Now that we have our total annual income and expenses, we can calculate NOI using the previously mentioned formula:

$49,920 – $12,751 = $37,169 Net Operating Income per Year

NOI doesn’t give you the whole picture—or even enough information to make any decisions, though. Instead, it is the basis for calculating most of the important metrics in our analysis.

Common Real Estate Performance Measurements

In the last section, we learned that NOI was the total income the property produced. But you might have been wondering, “Why doesn’t NOI include the expense cost of the loan, since that will ultimately affect your bottom line?”

Now, it’s time to get serious about cash flow.

Cash Flow

Cash flow is the money left over after all the bills have been paid. However, this simple definition gets a lot of people in trouble. You see, technically, cash flow is:

Income – Expenses = Cash Flow

But income may include more than just the rent, and expenses will include more than just the mortgage. You might say, “The mortgage is $800 per month and the property will rent for $1,000 per month—so my cash flow is $200 per month.”

False.

Other expenses include:

  • Taxes
  • Insurance
  • Flood insurance (if needed)
  • Vacancy
  • Repairs
  • Capital expenditures
  • Water
  • Sewer
  • Garbage
  • Gas
  • Electricity
  • HOA fees (if needed)
  • Snow removal
  • Lawn care
  • Property management

Some of these items are easy to calculate. You can call your insurance agent and ask for a quote, or ask the HOA president about typical fees. Don't get overwhelmed—the more properties you look at, the more you will understand what's "normal."

Unlike NOI, cash flow also includes your debt service under “expense.” We don’t include debt service in the NOI calculation because NOI dictates how much income the property produces—independent of the owner’s financing.

The monthly or annual debt service amount is specific to your financing plan. If we included debt service in the NOI, then NOI would only be meaningful for that specific loan. Different buyers have different financing, so it’s important to have a property-specific income metric.

As might now be obvious, cash flow is your total annual profit. The higher your loan payments, the smaller your cash flow. If you pay cash for a property, your cash flow is the NOI exactly, because that’s the property’s maximum cash flow.

Our monthly debt service on Maybury is $2,129, making our annual debt service $25,548. For this property, our cash flow would be:

$37,169 – $25,548 = $11,621

Paying cash minimizes debt service and thus maximizes cash flow. So, if you have the means to pay all cash for the property, why wouldn’t you? There are good reasons.

Rate of Return

Cash flow isn't the only important factor. You must consider the rate of return—also known as return on investment or ROI—too.

ROI is your cash flow relative to the cost of your investment, or your “basis.” Mathematically, that would be:

ROI = Cash Flow / Investment Basis 

What is a reasonable ROI? Let’s compare other investing vehicles.

  • High-interest savings accounts often have an ROI, or interest rate, of between 2-5%.
  • A certificate of deposit (CD) sports an ROI of about 5%.
  • The stock market has an average ROI of about 8-10%.

So, what’s our ROI on Maybury? There are a few numbers you should consider in your real estate investment analysis.

Capitalization Rate, or Cap Rate

Just like NOI is completely independent of financing costs, cap rate is a neutral figure independent of the buyer or their financing. It’s calculated as follows:

Cap Rate = NOI / Property Price 

Cap rate may be the single most important number in your real estate investment analysis. The cap rate is independent of the buyer and financing, making this calculation the most pure indicator of a property’s potential return.

Here is the cap rate for Maybury:

$37,169 / $418,000 = 8.89%

Here’s another way to think about cap rate: It’s the ROI you would receive if you paid all cash. Cap rate assumes the maximum investment amount—the full price of the property.

A “good” cap rate depends on where you’re buying. Most areas, however, see maximum cap rates between 8-12%.

Just like single-family houses, where prices are determined by comparable houses nearby, larger investment properties are valued based on the cap rate of comparable investment properties. If the average cap rate in your area is 10%, look for a 10% cap rate investment, at minimum. (Barring other more complex situations and considerations.)

Related: Return on Investment (ROI) Versus Cash on Cash Return (CCR)

Cash-on-Cash Return (COC)

Just like there are multiple income measures—NOI and cash flow—there are also multiple measures of return. The cap rate is the rate of return independent of financing, and the cash-on-cash (COC) return is dependent on financing. It’s directly related to the amount of cash you put down.

If you put $100 into a savings account, you might receive $4 per year, or 4% ROI. The COC measures your return if you had instead put that $100 into the property. COC is calculated as follows:

COC = Cash Flow / Investment Basis 

For Maybury, the annual cash flow is $11,621. In total, the down payment, improvements, and closing costs equal $98,000, creating a COC of 11.86%.

Here, we see clearly that Maybury beats both savings accounts and diversified stock portfolios… albeit with a lot more time and energy spent.

Everyone’s ideal rate of return varies. However, if you’re getting less than a 10% return on a property, it’s probably not worth your investment—consider investing that cash in the stock market instead.

Total ROI

In addition to cash flow, there are several other key financial considerations in your real estate investment analysis:

  • Tax consequences: You may gain or lose money to taxes.
  • Property appreciation: Because the real estate market is volatile, you may not be able to predict this.
  • Equity accrued: And don’t forget, your tenants’ rent pays off the property.

COC only considers cash flow’s financial impact; total ROI considers all the factors affecting your bottom line. It’s calculated as follows, where “total return” contains all of the considerations above.

Total ROI = Total Return / Investment Basis

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Let’s assume we can expect a 2% yearly appreciation for Maybury—or $8,360. The equity accrued in the first year of the mortgage is $3,251. And for the sake of this example, no tax breaks are available—or taxes due.

The total return for Maybury would be $23,232, making the total ROI 23.71%.

Not too shabby, huh?

Keep in mind that our real estate investment analysis only covers the first year of property ownership. In subsequent years, accrued annual equity increases, expenses rise with inflation, rental rates increase or decrease, and tax situations change.

No, you can’t predict the future—but you should extend your analysis out a couple years using trends or demographic data indicating the direction of the market and inflation.

Questions? Comments?

Join the discussion below.

By J Scott
J Scott runs a real estate company that invests in several parts of the country and that specializes in new construction, as well as purchasing, rehabbing and reselling distressed properties. J is ...
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    Mike McKinzie
    Replied about 10 years ago
    J Excellent article explaining the basics of analyzing a real estate investment. You took what some people make a 200 page book out of and turned it into a easy to ready essay. Great job.] Mike
    Lucia Garcia from Mallorca, Mallorca
    Replied about 3 years ago
    True thing. I thought the same thing you did Mike, good job there J Scott! Wish all the essays were like this.
    Julie Broad
    Replied about 10 years ago
    WOW!! This is a mini-course on the basics of real estate analysis. I am incredibly impressed. I will definitely be sharing this with our readers because there are a lot of people who don’t understand these terms. Great job!!! We don’t usually formally do more than a first year analysis but we usually do that analysis with a higher interest rate than what we’re getting and a conservative rent rate estimate plus we build in a 2 to 3 month rent contingency fund into the whole plan to help cover bigger expenses that might come up. The last couple of years our expenses have gone up more than our rents have in most of the properties we own. In some cases our expenses have gone up 5% and our rents have gone down 5% … (amazing how taxes keep going up even when the economy is slower!) so I don’t put much weight on forecasts we do. I think it’s more important to build in a buffer and put in a contingency fund. Good post!! Thanks!
    Richard Warren
    Replied about 10 years ago
    Hopefully Josh can put a link to this post where it’s easy for people to see. Outstanding job!
    Joshua Dorkin
    Replied about 10 years ago
    I made this a sticky post on the Real Estate Deal Analysis forum, Rich.
    Tony Velez Hvac from North Haven, Connecticut
    Replied almost 5 years ago
    Love it
    Peter Giardini
    Replied about 10 years ago
    J., what a fantastic job you did with explaining, in clear simple terms, how to evaluate income producing properties. This post should be made “sticky” somewhere here on Bigger Pockets. Pete
    J Scott
    Replied about 10 years ago
    Thanks folks…I appreciate the kind words and feedback! J
    Daniil Kleyman
    Replied about 10 years ago
    Very well-organized and concise article! Every real estate investor should have a basic understand of everything in this article, yet you’ll be amazed how many do not. Great job spreading the knowledge!
    James Scholl
    Replied about 10 years ago
    Very nicely done. I have noticed that some of my real estate appraisals on legitimate flipped properties that sold have had selling prices well below market. They sell fast and the investor gets his money out quickly but I wonder if there is another reason to leave that much money on the table ? (I. E. a property that sold for $80000 that could easily have sold for $90000) I am also wondering if anyone has done a similar post to J Scott’s above, but on marketing. Reply Report comment
    James Scholl
    Replied about 10 years ago
    Very nicely done. I have noticed that some of my real estate appraisals on legitimate flipped properties that sold have had selling prices well below market. They sell fast and the investor gets his money out quickly but I wonder if there is another reason to leave that much money on the table ? (I. E. a property that sold for $80000 that could easily have sold for $90000) I am also wondering if anyone has done a similar post to J Scott’s above, but on marketing.
    Tom
    Replied about 10 years ago
    Really we’ll done simple language explanation of the ways to analyze different property. I would love to know how to get a copy of the spread sheet you put the link of. Is it in your business plan on your blog.
    Jason
    Replied almost 10 years ago
    JScott, I didn’t think it was possible to outdo your previous analytical skills and gift for explaining things, but this post really sets you in a field of your own. Extremely well done. Jason
    Melinda Smith
    Replied almost 10 years ago
    This may already be posted somewhere, but is there any way we can get that spreadsheet template? That is so awesome! Thanks.
    J Scott
    Replied almost 10 years ago
    Melinda – Here you go: https://www.biggerpockets.com/forums/88/topics/51334-sfh-rental-analysis-spreadsheet-
    Melinda Smith
    Replied almost 10 years ago
    This may already be posted somewhere, but is there any way we can get that spreadsheet template? That is so awesome! Thanks.
    Nancy Yavorsky
    Replied over 9 years ago
    Excellent article. Thank you very much.
    Jim Simcoe
    Replied about 9 years ago
    This is great info, thank so much for posting!
    george
    Replied about 9 years ago
    i downloaded the spreadsheet, but cell F43 (equity accrued) is giving me error. is anyone else getting this error? the formula is “=-CUMPRINC(H6/12,12*H7, H4, 1, 12, 0)” and the error is #NAME? please let me know..
    george
    Replied about 9 years ago
    i downloaded the spreadsheet, but cell F43 (equity accrued) is giving me error. is anyone else getting this error? the formula is “=-CUMPRINC(H6/12,12*H7, H4, 1, 12, 0)” and the error is #NAME? please let me know.. Reply Report comment
    Litia
    Replied about 9 years ago
    Thank you very much J Scott for taking time to teach me all these concepts. Again thank you.
    Ryan Bowman
    Replied almost 9 years ago
    Great article. I found it very useful. Well written, concise and easily understandable. Thanks for sharing.
    Justin Yin
    Replied almost 8 years ago
    Hello, I was wondering what the formula was for Equity accrued? Thank you, Justin
    Kelv!n
    Replied over 7 years ago
    debt service payments made for the year minus interest charged over the year = equity.
    EVE
    Replied almost 8 years ago
    Hi J: Can you please explain how did you get the Accrued Equity of $3251 in this example? Whats the formula to it? Thank you in advance!
    EVE
    Replied almost 8 years ago
    Hi J: Can you please explain how did you get the Accrued Equity of $3251 in this example? Whats the formula to it? Thank you in advance! Reply Report comment
    Ivan
    Replied over 7 years ago
    This is a great post J, very very informative!
    Roger Goldberg
    Replied over 7 years ago
    Thanks for this very informative and easy to read article. I am just curious about why the xls template provided in the comments is for a single family home, whereas the article describes a multi unit property. I am a complete beginner so apologies if this a very simple question. What is the difference between this SFH template and the one used in the article? Thanks!
    SF
    Replied over 7 years ago
    Serious question, where are you getting a 30 year fixed note on NOO investment property?
    Anthony
    Replied over 7 years ago
    J Great article. The article gives new meaning to the old adage “… to truly be an expert on something, try to teach someone…” You take a very complicated and intricate subject and explain it in a way that makes sense to people who may not have the same knowledge base you do.
    Christila Milne
    Replied over 7 years ago
    Excellent!! Reply Report comment
    Christila Milne
    Replied over 7 years ago
    Excellent!!
    Paula
    Replied over 7 years ago
    Wondering the “equity accrued in first year of mortgage” was calculated. I’m having a problem with the Total ROI because of this. EVERYTHING ELSE was so clearly explained that I’d already started a spreadsheet like the one you have before I’d even seen it. Thanks for the information really!
    John D
    Replied over 7 years ago
    7 of the 8 units are vacant (empty)? Doesn’t that mean that 87.5% vacancy? Thanks for the article, I must be easily confused with numbers.
    John D
    Replied over 7 years ago
    Also, to me as a young guy it seems important to account for how our profits will change once the loan is paid off. Does a place that old fall apart or become undesirable after another 20-30 years or do we then have a lot more of a retirement income?
    John D
    Replied about 7 years ago
    bump.
    John D
    Replied about 7 years ago
    bump.
    david
    Replied over 7 years ago
    Excellent article. I’ve got one rental property and am looking at buying another. I have been trying to calculate my real return on investment to see if it is worthwhile, and even after reading this article I CAN’T SEE ANY REASON TO INVEST IN RENTAL PROPERTY IN LOS ANGELES, CA IN 2013 (or ever)… Maybe you can help me? The best place I’ve found so far was a duplex (with illegal third unit) that had 9 offers and sold for $775k (this month). One unit rented out for $2200 and the other rented for $2000 (so said the real estate agent, but she was a little unclear). The illegal unit was a studio in the basement that rented for $1000. The location is very hipster, and very desireable for walking to lots of shops. The price sold was below Zillow estimate (yeah i know) and similar to its projected price in 2008 (i.e. nearly full recovery to pre-bubble bursting price). When I run the numbers, I get a cap rate below 6% and a COC of zero (unless you count the basement studio). Remember, this is the BEST looking investment I’d found in 8 months of shopping. Please help! What don’t I get about LA rental property?
    J Scott
    Replied over 7 years ago
    David, In high-priced markets like LA, cash flow is nearly impossible to get. Most people who are investing in these markets are banking on appreciation, not cash flow.
    david
    Replied over 7 years ago
    Thanks for your response! I get it. Appreciation is helped greatly by leverage. But when I assume that appreciation (~3.2%/yr) is about the same as inflation (~3.1%/yr from Case-Shiller data and inflation over the last 100yrs). I find that my total return for most properties peaks somewhere 10-15yrs from date of purchase. Does that mean I should sell my property every 10-15 yrs, or is it possible to continue to re-finance and “re-leverage” my investment dollars?
    Will Moore from Rex, Georgia
    Replied over 3 years ago
    I just attended a 3 day real estate seminar over the weekend & learned about REI for the first time. It blew my mind. I am now looking for a mentor/coach. If you or anyone you know can help me please let me know. I am very dedicated to learning this business & will to put in the work. Thank
    Keith Ghion
    Replied about 7 years ago
    Hey folks for those of you wondering about the Equity Accrued calculation I was having trouble with it to but I believe I figured it out @J Scott or anyone else confirm this that would be a great help for those just learning. Since I like to fully understand calculations before I rely on spreadsheets, I did this by long hand month by month. First step is you have to convert your APR to a monthly APR. In the example that 7%. .07 / 12 gives you a monthly interest rate of .0058 or rounded to .006. Then you multiple your loan balance by your new MIR .006. In the ex that’s 320,000 x .006 giving you $1,920. Subtract your interest from monthly debt service and you get your monthly equity accrued. The first month that = $209. Do this month by month making sure you multiply the new balance by your MIR. So it looks something like this: 320,000 x .006 = 1,920 {2,129 – 1,920 = 209} 320,000 – 1920 = 318,080 x .006 = 1908 {2129 – 1,908 = 221} 318,080 – 1920 = 316172 x .006 = 1897 {2129 – 1897 = 232} Repeat for 12 months like above and add up your principal totaling your equity accrued.
    Michelle
    Replied about 7 years ago
    I loved this article! Extremely detailed and so valuable! I will say anything you write I will read and apply! Thank you!!
    J Scott
    Replied about 7 years ago
    Michelle – If you’re interested in rehabbing, feel free to pick up the books that BiggerPockets and I just released: https://www.biggerpockets.com/flippingbook
    Ken Higgins
    Replied about 7 years ago
    This is fantastic! Thank you so much. Can you recommend a free software that allows you to plug in the numbers and get the full analysis?
    Rodwell Smith
    Replied about 7 years ago
    Wonderful details and explanations! I was looking for deal summary spreadsheet but after reading this string of information I am well prepared to draw a Summary Table manually. Thank you and I will continue to receive updates.
    James Tobin
    Replied almost 7 years ago
    Awesome article. Can’t say anything that hasn’t already been said but thank J!!
    caleb
    Replied almost 7 years ago
    Can you share your multi-unit spreadsheet. I can see and download the SFH spreadsheet, but I’d really appreciate getting your multi unit spreadsheet in excel form (like the image file you posted here). Thanks, Caleb
    Becca Shaw
    Replied almost 7 years ago
    Thanks for tossing all the good knowledge into one brain dump! This was really helpful and I’ve bookmarked it so I can start to become familiar with all the steps.
    Becca Shaw
    Replied almost 7 years ago
    Thanks for tossing all the good knowledge into one brain dump! This was really helpful and I’ve bookmarked it so I can start to become familiar with all the steps.
    William Turner
    Replied over 6 years ago
    Bigger Pockets, where have you been for the past six months. This was a great article for doing evaluations and it was easy to understand. This is preparing me for my first deal….
    Joseph Furmansky
    Replied over 6 years ago
    Thank you for the crash course. In the paragraph determining “vacancy rate”, you wrote, “In our example property, only 7 of the 8 units are listed as vacant (which equates to about 12% vacancy),” I believe you meant to write, “only 1 of the eight units…..” or “only 7 of the 8 units are rented”. I would love to have a copy of your spreadsheet, so that I can plug in my data. Thank you
    Brett Shepherd
    Replied over 6 years ago
    Joseph. Here is a link to it. https://www.biggerpockets.com/files/user/JasonScott/file/20-sfh-rental-analysis After discussing appreciation as part of Total ROI, I wonder why Appreciation was taken off the final SS, but was shown on an earlier jpg of the example deal..
    Paul Haughton
    Replied over 6 years ago
    Hi J, Excellent info here. The way you broke it down made the concepts easy to grasp. Thanks!
    Paul Haughton
    Replied over 6 years ago
    Hi J, Excellent info here. The way you broke it down made the concepts easy to grasp. Thanks!
    Paul Haughton
    Replied over 6 years ago
    Hi J, Excellent info here. The way you broke it down made the concepts easy to grasp. Thanks!
    Franko
    Replied over 6 years ago
    “So, to assess total income on the property, you want to subtract out the income that you likely won’t see due to vacancy. In our example property, only 7 of the 8 units are listed as vacant (which equates to about 12% vacancy), so we’ll go with that for our analysis. So, our total monthly income for this property would be:” This should be “only 1 of the 8 units are listed as vacant” I”m sure others have noted this but i figured I’d mention it….
    Liz Brumer
    Replied over 6 years ago
    J Scott, I was able to find your SFH Rental analysis but couldn’t locate the example commercial/multifamily one used in this post. Do you have a template that could be uploaded here or sent to me directly? This post was excellent!
    Alan Malicse
    Replied over 6 years ago
    Excellent article J Scott! I’m just getting my feet wet in investing and this helped tremendously in understanding and familiarizing myself with all the terms I need to know! Great Job!
    Herb
    Replied over 6 years ago
    Great article. Thank you for spending the time to put it together. One question: Why is the summation of Cash Flows not considered in the total return? I fully understand including the accrued equity, appreciation, etc. but do not understand why the total return in calculated based on only the particular year in question. For example, in Year 10, I would use the the summation of Cash Flows from Year 1 – 10, as opposed to just the cash flow in year ten. Further, you could even place an opportunity cost on these cash flows of anywhere between 2 – 7% if you anticipate to invest in CD, stocks, etc. Thanks! Reply Report comment
    Herb
    Replied over 6 years ago
    Great article. Thank you for spending the time to put it together. One question: Why is the summation of Cash Flows not considered in the total return? I fully understand including the accrued equity, appreciation, etc. but do not understand why the total return in calculated based on only the particular year in question. For example, in Year 10, I would use the the summation of Cash Flows from Year 1 – 10, as opposed to just the cash flow in year ten. Further, you could even place an opportunity cost on these cash flows of anywhere between 2 – 7% if you anticipate to invest in CD, stocks, etc. Thanks!
    Cristina Abellar
    Replied over 6 years ago
    And who says nothing is free anymore? The information J Scott had diligently put together in this post is PRICELESS! He made it clear & simple to understand. I found Bigger Pockets because of your 123flip site, thank you! You are a true blessing to mankind, more power to you!
    Anthony Armstrong
    Replied over 6 years ago
    Pretty sure this was the most beneficial, and concise explanation of every question that has crossed my mind when I have been on the BP forums. Combining the explanations with instant examples helped push the point home. I will definitely share this information with friends and go back to it on a regular basis to make sure I am understanding the important parts of doing a financial analysis.
    Mike Hernandez
    Replied over 6 years ago
    Hi J, I want to Thank you for taking time in writing this article!! The information presented here cleared up a lot of questions my wife and I had about analyzing deals. Thanks again J!
    Scott Kelley
    Replied over 6 years ago
    Thank you for the post and spreadsheet. This is exactly what I’ve been looking for and is so helpful!
    Scott Kelley
    Replied over 6 years ago
    Thank you for the post and spreadsheet. This is exactly what I’ve been looking for and is so helpful! Reply Report comment
    Scott Kelley
    Replied over 6 years ago
    Thank you for the post and spreadsheet. This is exactly what I’ve been looking for and is so helpful! Reply Report comment
    Andrew Morris
    Replied over 6 years ago
    When you click on the link at the end of the article labeled ” here is a full financial analysis of this particular property” it shows a picture of the spreadsheet for multi family and has the “key values block at the top right hand of the sheet. Does anyone know where I can find “that” spreadsheet. I am assuming J Scott created it. I know that the SFH Rental Analysis is close to that spreadsheet and I have that downloaded. Just wondering if anyone has the one listed in the article. I don’t know what it would take to create the multi family one and have the formulas to create the key ratios in the top. The one in the article is more streamlined for what I want to do. Thanks for all your help.
    Rohit Yadav
    Replied over 6 years ago
    Very nice post. Real estate is good option for investment. If you are thinking about investing Real Estate in Gurgaon than go for Emaar mgf palm drive.
    Jose Figueroa
    Replied over 6 years ago
    Thank you for taking the time to consolidate the fundamentals of investment analysis on multifamily properties. This will be very helpful for my soon to be first deal. This post has lead me to support you and buy your book.
    Osman
    Replied over 6 years ago
    Thank you so much for this wonderful article. It is very helpful. I was difficulty in deriving the Cap rate. This article explains it quite well. Good Work!
    Osman
    Replied over 6 years ago
    Thank you so much for this wonderful article. It is very helpful. I was difficulty in deriving the Cap rate. This article explains it quite well. Good Work! Reply Report comment
    Dan Ryu
    Replied over 6 years ago
    Excellent article! Thanks @J Scott! If anyone has an answer to this question: – For ROI, Appreciation in the example was calculated at 2% because of the of the $10,000 in improvements. – Since value of the MFR is calculated based on income it produces, are we assuming that the 2% ($8,360) will be due to increased rents we collect? ($8,360 / 7 Units rented (12% cap rate) / 12 months = $99 / extra per door) Also for NOI: NOI = $49,920 – $12,751 So basically, expenses = about 26% (12,751 / 49,920) I get the calculation but I’m wondering how it’s so different from the 50%-60% Rule that is often quoted and if that’s typical for a MFR?
    Dan Ryu
    Replied over 6 years ago
    Excellent article! Thanks @J Scott! If anyone has an answer to this question: – For ROI, Appreciation in the example was calculated at 2% because of the of the $10,000 in improvements. – Since value of the MFR is calculated based on income it produces, are we assuming that the 2% ($8,360) will be due to increased rents we collect? ($8,360 / 7 Units rented (12% cap rate) / 12 months = $99 / extra per door) Also for NOI: NOI = $49,920 – $12,751 So basically, expenses = about 26% (12,751 / 49,920) I get the calculation but I’m wondering how it’s so different from the 50%-60% Rule that is often quoted and if that’s typical for a MFR?
    Alex
    Replied over 6 years ago
    This is a great post. Really informative. I’ve used this post to evaluate first a 4-unit mf property that I had under contract, but backed out of when I could not make the numbers work, and now a single family property that is under contract and closing in the next 30 days. Thanks!!!
    William
    Replied about 6 years ago
    J Great post! I guess it kind of weird but I love doing the numbers and analyzing deals bc it can provide a much clearer picture on what a “good deal is”. I also purchased your book to learn more and support you and the Biggerpockets community. Be well, Willie Bonati
    Dusty
    Replied about 6 years ago
    Great explanations!! Thanks so much Scott!! Ill be picking up your book!!
    Dusty
    Replied about 6 years ago
    Great explanations!! Thanks so much Scott!! Ill be picking up your book!!
    scott
    Replied about 6 years ago
    Where did you get 3251 on total ROI. How does this apply if I pay cash for entire purchase and then roll in to cash out refi for same 50K? Thanks so much for the help, Scott
    J Scott
    Replied about 6 years ago
    Scott — The $3251 is the equity accrued through principal payments throughout the year.
    Jen Kurtz
    Replied about 6 years ago
    This is a really wonderful and helpful post! I am so glad I came upon this 4 yes after you wrote it! Definitely simplifies info in books! Thank you!
    Kyle
    Replied about 6 years ago
    Excellent article and very useful !
    Roger Goldberg
    Replied about 6 years ago
    Does anyone know where to get the multi-family version of the spreadsheet that this article is based on? Thanks!
    Roger Goldberg
    Replied about 6 years ago
    Does anyone know where to get the multi-family version of the spreadsheet that this article is based on? Thanks!
    Roger Goldberg
    Replied about 6 years ago
    If I am buying a property all cash, with no financing, then when i fill out the SFH spreadsheet I get a bunch of errors at the bottom because the calculations are dividing by 0. How do I fix this?
    J Scott
    Replied about 6 years ago
    The lines at the bottom are calculating loan information — if you have no loan, these lines are irrelevant, so you can just ignore the divide-by-0 errors.
    Roger Goldberg
    Replied almost 6 years ago
    Ok great, thanks Scott! Just curious, Is the multi family spreadsheet that your article is based on available for download somewhere? I see lots of people have asked the same question and was just wondering if it is possible to get it. Thanks! looking forward to your upcoming event in NYC
    Dawn-Marie Black
    Replied almost 6 years ago
    Excellent article! Thanks so much for the info!
    Dawn-Marie Black
    Replied almost 6 years ago
    Excellent article! Thanks so much for the info! Reply Report comment
    Dawn-Marie Black
    Replied almost 6 years ago
    Excellent article! Thanks so much for the info! Reply Report comment
    Anthony
    Replied almost 6 years ago
    Great article This breaks it down for us newbie’s Thanks
    Anthony
    Replied almost 6 years ago
    Great article This breaks it down for us newbie’s Thanks
    Allison
    Replied almost 6 years ago
    Thank you so much for providing such a clear breakout of the terms/steps involved. I am fairly new to BP and have been looking for a source as a one-stop-shop — you definitely delivered!
    JerryW.
    Replied almost 6 years ago
    J. Scott, I know this is an old article, but I wanted to post how much I liked it. I also really liked your 2 books on flipping houses and estimating rehabs. Thank you for taking the time to write this. I know you were doing extremely well in Atlanta then branched out into Milwalkie. I am curious where your main focus is now.
    J Scott
    Replied almost 6 years ago
    Hi Jerry, Thank you for the kind words! As George indicated, we’ve recently relocated to Maryland, and we’re starting to do deals here as well. We’re still doing some projects in Atlanta (mostly new construction/spec building) and we finishing up some projects in Milwaukee as well, though I don’t expect to be investing in new projects in Wisconsin.
    Shelly Scruggs from Baltimore, Maryland
    Replied over 4 years ago
    Hello Jeremy Scott, This article will definitely be a go to as a newbie and BP lover. I am in Maryland. I understand the article was done a year ago. Are you still here?
    george p.
    Replied almost 6 years ago
    Maryland
    ABubaker Sirur
    Replied almost 6 years ago
    Thank you for your blog. It was very helpful in understanding the process of financial analysis and ensuring that there is profit in the the property prior to obtaining it. Thanks, again!
    Gloria D. Wilson
    Replied over 5 years ago
    Wow! Wonderful tutorial – I’m going to go back thru it again. There are three triplexes I am considering – and definitely want to make sure I totally understand how to do my due diligence – What I really love about your presentation is that it’s in plain English -broken down so simply, yet thoroughly so that I can comprehend and apply what you’ve presented. Thanks so much for this.
    Peter Zichichi Investor from Wallingford, CT
    Replied over 5 years ago
    Thank you
    Account Closed Commercial Real Estate Agent from Nashville, Tennessee
    Replied over 5 years ago
    Hi J Scott, Thank you for this guide! I just wanted to confirm with you that this guide can be used to evaluate single-family homes? You mentioned at the beginning that the value of multi-family properties is determined by income potential and single-family homes is determined by comps. Would the above analysis be altered in any way to reflect a potential single-family deal? Or, could you use the same metrics to evaluate a single-family property? I’m a newbie— Thanks!
    Tia Rubadeau Investor from Syracuse, New York
    Replied over 5 years ago
    Thanks so much! As I’ve been listening to the podcasts I’ve been making mental notes about the things I really need to develop a better understanding of. This lays a lot of it out there for me. Tremendously appreciated!
    Jonathan Bridgers from Dayton, Ohio
    Replied over 5 years ago
    Thanks for taking the time to explain the fundamentals of analyzing a potential deal. Building upon these basic building blocks, I hope to at least eliminate ‘deals’ that do not qualify and to continue searching for those that do. Thanks so much!
    Shean Rhoden Investor from Hackensack, New Jersey
    Replied over 5 years ago
    I’m learning something new every day in my REI education. Thank God for BP!
    Ben Staples Investor from Chicago IL
    Replied over 5 years ago
    This is great. Thanks so much for this! Really consolidates a lot of learnings
    Joseph Benedict Investor from Muskegon, Michigan
    Replied over 5 years ago
    Best article I have read on analyzing investment properties! It is very simple to understand and any person that is looking to start investing should read this.
    John Nguyen from Winnetka, California
    Replied over 5 years ago
    I actually read all the comments, ’cause I too was confused on how our generous blogger, Mr. J Scott, got the figure $3251 for equity accrued. Seems like a lot of people were confused, so I’ll post what I believe is somewhat of a good answer. I used the mortgage calculator at bankrate.com to add up the first year’s equity. You can find it here at this link, prepopulated with his example’s figures: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx?loanAmount=320000&years=30&terms=360&interestRate=7.000&loanStartDate=09+Dec+2014&show=true&monthlyAdditionalAmount=0&yearlyAdditionalAmount=0&yearlyPaymentMonth=+Dec+&oneTimeAdditionalPay Thanks, J Scott. And good luck to everyone else! I hope my 2 cents helps!
    Darrie
    Replied over 5 years ago
    John – I just finished reading all the comments. I was hoping to find info. on equity accrued … which i did of course. When I used the formula for equity accrued ( debt payments made for the year minus interest paid for the year ) I came up with $ 3,148. But now, thanks to your 2 cents, I can use the mortgage calculator at bankrate.com. I just clicked on your link. Thanks! You just helped clear the last concern I had about using the Analysis Worksheet accurately. I created it last night on excell and plugged in formulas wherever I could to cut down on errors. Reply Report comment
    Darrie
    Replied over 5 years ago
    John – I just finished reading all the comments. I was hoping to find info. on equity accrued … which i did of course. When I used the formula for equity accrued ( debt payments made for the year minus interest paid for the year ) I came up with $ 3,148. But now, thanks to your 2 cents, I can use the mortgage calculator at bankrate.com. I just clicked on your link. Thanks! You just helped clear the last concern I had about using the Analysis Worksheet accurately. I created it last night on excell and plugged in formulas wherever I could to cut down on errors. Reply Report comment
    J Scott Developer from Sarasota, FL
    Replied over 5 years ago
    Here you go, John: https://www.biggerpockets.com/forums/88/topics/165286-j-scott-analysis
    John Nguyen from Winnetka, California
    Replied over 5 years ago
    Thanks so much, J Scott. It makes a lot more sense now!
    Darrie
    Replied over 5 years ago
    John – I just finished reading all the comments. I was hoping to find info. on equity accrued … which i did of course. When I used the formula for equity accrued ( debt payments made for the year minus interest paid for the year ) I came up with $ 3,148. But now, thanks to your 2 cents, I can use the mortgage calculator at bankrate.com. I just clicked on your link. Thanks! You just helped clear the last concern I had about using the Analysis Worksheet accurately. I created it last night on excell and plugged in formulas wherever I could to cut down on errors.
    John Nguyen from Winnetka, California
    Replied over 5 years ago
    Hi Darrie, I’m glad I could be of help! How did you figure out your version of the interest paid for the year? I know that the debt payments is 25,548 (from 2129×12), but how did you figure out the interest paid for the year (or get close to it) to end up with your version of the equity accrued? I worked backwards, and took the total debt payment and subtracted the equity figure that J Scott gave us (22,548-3251), which equals 22297, but I could not find that figure anywhere in the article or know how to get calculate that figure. It says “?We can calculate that the equity accrued in the first year of the mortgage is $3251.” Where did this calculation come from? I had to use the bankrate.com mortgage calculator to figure it out! But I was hoping someone would tell where they got the numbers to calculate it… J Scott? Any help, please? Thanks! – John
    John Nguyen from Winnetka, California
    Replied over 5 years ago
    I meant 25,548-3251, by the way (not 22,548-3251 as stated above). Any takers? Any help would be greatly appreciated!
    Rob Bleecher Investor from Lancaster, Pennsylvania
    Replied over 5 years ago
    Excellent… simple straightforward explanation!
    Satya Thiru
    Replied over 5 years ago
    Thanks J Scott for this blog post on real estate analysis. You have explained some the financial terminology easy to understand.
    Jamie Jacobs from Houston, Texas
    Replied over 5 years ago
    Thanks for this article! Answered lots of questions. Even ones I didn’t know I had! =]
    Brandon Harnsberger
    Replied over 5 years ago
    Hi, Great break-down & example – THANK YOU! This is my first time using the above to analysis a property that we purchased. My Question is…. How does rate of appreciation (3% used in example above) effect the value of Multi-Family if the value is based on Rents (NOI) and/or Cap Rate and not on general market appreciation? Would it be correct or incorrect to add an average of 3% Appreciation? Any input or advise on this would be appreciated. Reply Report comment
    Brandon Harnsberger
    Replied over 5 years ago
    Hi, Great break-down & example – THANK YOU! This is my first time using the above to analysis a property that we purchased. My Question is…. How does rate of appreciation (3% used in example above) effect the value of Multi-Family if the value is based on Rents (NOI) and/or Cap Rate and not on general market appreciation? Would it be correct or incorrect to add an average of 3% Appreciation? Any input or advise on this would be appreciated.
    J Scott Developer from Sarasota, FL
    Replied over 5 years ago
    Brandon – You can certainly factor in appreciation if you like. But, keep in mind two things: 1. Appreciation isn’t guarantee, so make sure you have a reason for the number you choose and understand that it may not materialize. 2. If you’re going to account for appreciation, you should probably account for inflation as well. So, modify your expense numbers as well.
    Elliot Larkin from Gainesville, Florida
    Replied over 5 years ago
    Thank you so much Josh, you’ve summarized a course I took with sweet brevity and clarity! One question: if the Total Return = $11621 + $8360 + $3251 + $0 = $23,232 with a 20% downpayment. What would the total return look like if one were to pay for the property 100% in cash? Would there be no equity accrued since you already own the house outright?
    Jonathan Perez Rental Property Investor from West Columbia, South Carolina
    Replied over 5 years ago
    Great article. I definitely took notes on it. Thank you.
    Christian
    Replied over 5 years ago
    Really would like to know how you calculated a monthly debt service payment of $2,129??? Apologize for the ignorance but I do not know how this number was reached. How can one calculate it?
    J Scott Developer from Sarasota, FL
    Replied over 5 years ago
    Hey Christian, There’s an Excel function called PMT() — that will calculate the payment if you provide the inputs.
    Christian Silva Real Estate Investor from Tampa, Florida
    Replied over 5 years ago
    Oh ok. So it is not something that can be calculated off the top of the head like the NOI for example??
    James Burgess Investor from Macon, Georgia
    Replied over 5 years ago
    One thing I haven’t seen is how to calculate total return on investment when I buy and hold, but I also had a significant increase in market value through initial improvements and buying under market value. Basically, I buy for 40K, put 10k in improvements, and the new market value is 100k, but I hold with annual appreciation of 2%. Is that an irrelevant number or what is a better number to determine when it is time to sell?
    J Scott Developer from Sarasota, FL
    Replied over 5 years ago
    Hey James, Remember that no single calculation is going to give you the entire financial picture. Cash-on-cash return will tell you how well the property might do in a particular year, for example, but won’t tell you how well it will do over lifetime of the investment. In your example, the equity you get when you purchase and rehab is trapped until you either refinance or resell, so that’s something that you’ll have to look at the entire investment return to see how it impacts you. For things like that, using IRR is my personal favorite metric. Here is an example: https://www.biggerpockets.com/renewsblog/2010/09/02/introduction-to-internal-rate-of-return-irr/
    J Scott Developer from Sarasota, FL
    Replied over 5 years ago
    Hey James, Remember that no single calculation is going to give you the entire financial picture. Cash-on-cash return will tell you how well the property might do in a particular year, for example, but won’t tell you how well it will do over lifetime of the investment. In your example, the equity you get when you purchase and rehab is trapped until you either refinance or resell, so that’s something that you’ll have to look at the entire investment return to see how it impacts you. For things like that, using IRR is my personal favorite metric. Here is an example: https://www.biggerpockets.com/renewsblog/2010/09/02/introduction-to-internal-rate-of-return-irr/
    Megan Carpenter REI from Littleton, Colorado
    Replied over 5 years ago
    As holding multi-family units is my eventual goal, I found this article immensely helpful. Not only did it allow me to mentally prepare for how I will conduct my analysis, but it illuminated the way in which I am currently looking at numbers for SFH deals I am working on. This article was incredible helpful as a beginning investor using terms and the derision of those components breaking the content into an accessible example.
    Jacob Sanders from Douglasville, Georgia
    Replied over 5 years ago
    Wow! That was an awesome article! Analyzing property deals is something that I had been wanting to get more information on because my wife and I are new to the world of REI and are looking at properties for our first flip or rental. This is definitely being printed and added to my collection of resources!
    Jacob Sanders from Douglasville, Georgia
    Replied over 5 years ago
    Wow! That was an awesome article! Analyzing property deals is something that I had been wanting to get more information on because my wife and I are new to the world of REI and are looking at properties for our first flip or rental. This is definitely being printed and added to my collection of resources!
    Chad G. Rental Property Investor from Denver, Colorado (CO)
    Replied over 5 years ago
    This was a great article, but I am a little confused. According to the equations ROI and COC return are identical: ROI = Cash Flow / Investment Basis COC = Cash Flow / Investment Basis Based on the two articles below it would seem that actually ROI = Cash Flow / Property Price. Meaning ROI = COC only in an all cash investment. Was the article mistaken or are ROI and COC in fact always identical? If this was a mistake can we get the article updates so others are not unwittingly misled? https://www.biggerpockets.com/renewsblog/2007/02/04/return-on-investment-cash-on-cash-return-real-estate/ http://kclau.com/investment/cash-on-cash-return-vs-roi/
    J Scott Developer from Sarasota, FL
    Replied over 5 years ago
    Hey Chad, A couple points of clarification: – First, ROI is a very generic term. While there is a specific definition, in real estate investing, there are about a dozen different equations that you could refer to as ROI and they’d all provide different results. For that reason, I highly dislike the term — it’s too ambiguous. – Generally speaking, when people talk about ROI in buy-and-hold real estate, they’re referring to cash-on-cash return. So, the two are typically used interchangably. – When I say “Investent Basis” as the denominator in the equation, I’m talking about the total cash the investor has invested in the deal, not the “basis” of the property from an accounting standpoint. So, if you had a loan, the investment basis would be reduced. But, in general, yes, COC and ROI are the same thing…let me know if that didn’t clarify…
    Chad G. Rental Property Investor from Denver, Colorado (CO)
    Replied over 5 years ago
    Fair enough. I just want to make sure I understand what I am talking about (or at least sound like I do!). It seems that ROI as a term should just be avoided in favor of the more explicit COC so I will stick to that. Thanks for the prompt reply and the very helpful article!
    J Scott Developer from Sarasota, FL
    Replied over 5 years ago
    Exactly. I looked at that second article you posted, and the author just applies a different definiton of ROI.
    Baljot Singh
    Replied over 5 years ago
    How do you obtain the excel calculation file? (shown in the pictures as examples). Thanks! Reply Report comment
    Baljot Singh
    Replied over 5 years ago
    How do you obtain the excel calculation file? (shown in the pictures as examples). Thanks!
    Eduardo Aguilar from Lewisville, Texas
    Replied over 5 years ago
    Hello, I’m new here, just getting started in this investing in real estate world. thanks for the excellent article. Also thanks for sharing your spreadsheet. Just curious, how do you come with an appreciation of $8360 (2% of property value, if I understood correctly). If property value is $410k ($400k+10k), 2% appreciation should be $8200. It seems like you took 2% of $418k which would include the closing costs. Am I missing something, or why did you include the closing cost as part of the property value? Thanks again and I appreciate your time.
    Joel Bowen from Portland, Oregon
    Replied about 5 years ago
    J. Scott this is amazing! Thanks so much
    PJ Muilenburg Rental Property Investor from Sapulpa, OK
    Replied about 5 years ago
    So would it be appropriate to use these metrics (cash-on-cash return and total ROI) long AFTER a purchase in order to see how successful each house is that year?
    Maricarmen Toro Lender from Mc Lean, Virginia
    Replied about 5 years ago
    Hi, I’m a newbie. Thanks for the great article!
    Greg Gibbons Investor from Louisville, Kentucky
    Replied about 5 years ago
    Very well written explanation of different measurements. I really liked that you explained the need for the various measurements, not jut how to calculate them.
    Justin Cole from Lake Oswego, Oregon
    Replied about 5 years ago
    There are a ton of grammatical errors in this article as well as the “7 out of 8 Units are vacant” piece that someone else mentioned before. I am surprised as the extremely poor editing and review of this article. That being said, there is good data, just sloppy writing.
    J Scott Developer from Sarasota, FL
    Replied about 5 years ago
    I think you meant that you’re surprised “at” the extremely poor editing. Good rule of thumb is to always proofread your critiques of other people’s writing before posting! On the bright side, at least you’re now aware that I’m a bad writer, and you can just abstain from reading my other articles and blog posts. I apologize for wasting your time and wish you good luck in your investing endeavors. J Scott
    Tony Velez Hvac from North Haven, Connecticut
    Replied almost 5 years ago
    Lol.
    Nathan W. from Alexandria, Virginia
    Replied about 5 years ago
    LOL at @J Scott’s last comment. Since the comments to this post are still alive, I thought I would weigh in. 1. Awesome refresher. It is always good to review the basics every now and again IMO. This is a very good article for any fledgling investor looking to get into the buy and hold market. 2. Man 4% rates from savings account? My how the world has changed since 2010 lol Thanks for the article. BTW stayed up all night last night reading your New Spec Diary project. I had intended to just start it and go to sleep, but of course that didn’t work and I read it through in one sitting. Great stuff man.
    Daniel Ruby from Enfield, Connecticut
    Replied about 5 years ago
    Well done I am learning a lot from BP. I have a question is there a software I can download to put a analysis together in a nice presentation to attract potential JV partners?
    Ben Staples Investor from Chicago IL
    Replied about 5 years ago
    Thanks so much for taking the time to put this together J!
    Altamar Knighton Flipper/Rehabber from Edison, NJ
    Replied about 5 years ago
    I am an inspiring all cash buyer investor and have been on the learning side for the past few months. All I can say is thank you for your detailed and “Straight to the point’ method. Thank you!
    Drew Minder from Clover, South Carolina
    Replied about 5 years ago
    Well done on this article. I think some people may be confused on how you calculated the equity that was paid off but overall everything was put in simple terms. Awesome!
    Joshua Foch Investor from Anchorage, AK
    Replied about 5 years ago
    Awesome article J. Scott! I’ve been trying to find something exactly like this for a while now.
    Gloria Riley Rental Property Investor from Orlando, FL
    Replied almost 5 years ago
    Wow! This was an excellent article. This is a great starting point for us new/beginner investors! I’m excited to do my first deal. Thank you!
    Bob Maccini from Orlando, Florida
    Replied almost 5 years ago
    Wow, thanks @J Scott. As a new investor, this is exactly the information I needed to get started in my property searches and evaluations!!
    Eddie Atkinson from Woodstock, Georgia
    Replied almost 5 years ago
    I agree. This is a great article. It definitely makes getting started a lot less intimidating. I also just read “The Book on Flipping Houses”, which I would recommend to anyone even remotely curious about the flipping process. Another great read. Thank you!
    Michael Farrer from High Harrington, Cumbria
    Replied almost 5 years ago
    Absolutely one of the best written and easy to understand articles on how to analyze a deal financially and why you need to.
    Kin Hei Lam Architectural Drafter from New York , New York
    Replied almost 5 years ago
    Hi J In the ROI example with the high interest bank account. You have the interest at 5%. In the example you put $100 into the account and said the return should be $4. From a purely mathematical stand point shouldn’t the return be $5 on a $100 investment at 5%? Is this a mistake or are there some weird banking rules that I don’t know about? Thanks Kin
    Charlie Castro Investor from Santa Monica, California
    Replied almost 5 years ago
    Good stuff. I’ve been developing my own analysis tool, and this is immeasurable in helping. I have one value I cannot understand the formulation: Equity Accrued. Does this value coincide with the amortization of the mortgage amount? How can I calculate the amount, what’s the baseline formula? I have a amortization schedule included in my analysis tool, so I can see any month of any year if needed. Thanks in advance!
    Hoa P.
    Replied almost 5 years ago
    In case anyone is looking for the spreadsheet referenced in this article – I believe it’s located here: https://www.biggerpockets.com/files/user/JasonScott/file/20-sfh-rental-analysis
    Michael Bier Rental Property Investor from Kennewick, WA
    Replied almost 5 years ago
    Jay, this is a great article. I have been looking for something like this to explain all the different terms in plain words. Thanks for the info.
    Harold Felder Investor from Charlotte, North Carolina
    Replied almost 5 years ago
    Hey Jay, I just joined BP and articles like this is the reason I joined. I’ve read a number of articles thus far, however, none were as clear as this one.
    Tony Velez Hvac from North Haven, Connecticut
    Replied almost 5 years ago
    I’m always nervous about the tenants. Why I don’t know? That’s what has been holding me back. As well as the exact expenses.
    Don Alberts from Frankfort, Illinois
    Replied almost 5 years ago
    Excellent article defining and explaining the calculations of investment returms. You have done a great job. Don
    German Buendia Specialist from Temecula, CA
    Replied almost 5 years ago
    The equation to calculate the equity accrued is as follows: First you have to find how much you will owe on your mortgage after one year =-FV(.07/12, 12, -2129, 320000) the total of that equation is = 316749.41 320000-316749= equity accrued. I hope this helped a little.
    Lesly Jean-Baptiste from Kutztown, Pennsylvania
    Replied almost 5 years ago
    Great post. Very concise and easy to understand without jargon. I will definitely take notes and remember to be thorough in my aasessments of real estate ventures going forward. Thanks
    Account Closed from Torrance, California
    Replied over 4 years ago
    This will help me begin practicing analyzing properties. Thanks for putting in the time on this great and informative article.
    Lena
    Replied over 4 years ago
    It’s all been said prior but thank you for taking the complex terms and simplifying them so that it is concise and easy to digest. Great easy examples to follow. Very impressive!
    Rebecca Rodriguez Rental Property Investor from Houston, TX
    Replied over 4 years ago
    Great article – thank you so much. Is the downloadable flyer/ proforma link broken? I can’t seem to get it to open?
    Ayodeji Kuponiyi Investor from King of Prussia, Pennsylvania
    Replied over 4 years ago
    does the Cap Ex go under the Expense or taken from the Cash Flow?
    Ralph D. Investor from South Yarmouth, Massachusetts
    Replied over 4 years ago
    Great read. Posts like this are the reason I decided to join the BP forum. Great concepts in an easy to read and understand format.
    Umair Mahmood from Jeddah, Jeddah
    Replied over 4 years ago
    Great article! Beautifully written and explained. Thanks J Scott
    Frank Smith
    Replied over 4 years ago
    Great job. Thanks!
    Janos Koos from Hilton Head Island, South Carolina
    Replied over 4 years ago
    This is a very infomative article and easy to understand.Thank you very much J !
    Sebastien Hitier Rental Property Investor from Hong Kong, Hong Kong Island
    Replied over 4 years ago
    It is very well written, and the metrics it uses for profitability are the same I use. As each year ends, I look back at how the pro-forma compare to the actual performance during the year.
    Account Closed from Berlin, Berlin
    Replied over 4 years ago
    Hello, I’m a newbie and I just found this article!, so well explained!! I am way excited to go gather all the numbers I need and then use it. But I have a question…maybe a silly one but still; I live in Europe, in Berlin Germany to be exact and have to insert everything in €, does that matter at all or can I change the spreadsheet. Also, where can you find the spreadsheet for Multifamily houses? Thanks so much!
    Sol Bergren Investor from saskatoon, sk
    Replied over 4 years ago
    Amazing article J Scott!
    Nick Munger from Lincoln, Nebraska
    Replied about 4 years ago
    I was first introduced to these concepts or measurements about 12 years ago when I read Rich Dad Poor Dad and Real Estate Riches by Dolf De Roos. Unfortunately, I wasn’t ready to jump in to REI like I am now. Great article!
    Nicholas Flores Flipper/Rehabber from San Antonio, Texas
    Replied about 4 years ago
    Great article! This was very informative and a good refresher to the concepts taught in the Rich Dad Poor Dad Series.
    Chris Leyva from Miami, Florida
    Replied about 4 years ago
    nice thanks
    Account Closed from Lawrence, Kansas
    Replied about 4 years ago
    @J Scott Thanks so much for this… I really was the first piece that allowed me to factor in my equity gain each year… I had found a simple cashflow and cash on cash return from Brandon Turner but this was what I needed. Now I just need to figure out what my next step is moving forward to another property.
    Chris McDonald Appraiser from Richardson, TX
    Replied about 4 years ago
    Hi, I love the article! Thank you so much for putting it together! I have one question. Its a small point, but in the “Assessing Property Income” section, it seems the laundry income ($200/month) is left out of the calculation of annual income. Was this done on purpose? (Specifically, $4700 x 12 months = $56,400. Not $54,000.)
    Chris McDonald Appraiser from Richardson, TX
    Replied about 4 years ago
    I found my error. Thanks again for a great guide!
    Jennie Ortiz from Greer, South Carolina
    Replied about 4 years ago
    Thank you for sharing this wealth of information. I am no doubt new and investing a lot of time learning as much as I can about the investment business and appreciate this site and the education and the great people. Thank you again,
    Man
    Replied about 4 years ago
    Very useful share.. If you’re looking into real estate investments, you likely want to earn wealth on real estate based on risk you are taking, while minimising the amount of time you need to spend attending to the property. In order to accomplish this, you need to make some smart choices upfront when buying investment property.
    Tom Furlough from Houston, Texas
    Replied about 4 years ago
    Best explanation of these terms that I’ve found. Thanks!
    Michael Martin from Saint Helens, Oregon
    Replied about 4 years ago
    Great post. Thank you so much
    Jason Ledford Investor from King, North Carolina
    Replied about 4 years ago
    Very Informative. Great Post . This gave a lot better perspective on my investments. Thanks
    Stewart Vargas-Sosa Attorney from Orlando, Florida
    Replied about 4 years ago
    On your rental property spreadsheet there is no cell for PMI, so should I just put it in one of the monthly expenses category?
    Tim DeBellis
    Replied about 4 years ago
    Great article. I love how you’ve laid out the concepts in a very basic and simple to understand way.
    Jorge Gastelum from Tucson, Arizona
    Replied about 4 years ago
    Great info and the way is explained makes it easy to read and understand!
    Benjamin Molina from Sacramento, California
    Replied almost 4 years ago
    J thank you SO MUCH for this article! I’m green but here’s my question: When calculating Total Return, can I add the mortgage interest deduction I would receive from my W2 income and include it? (i.e, I pay mortgage interest of $12,000 and assume a 25% tax rate, therefore add this $3,000 to my total return each year? Obviously it would be more conservative to leave it out, yet if there were negative tax consequences of the deal I would no doubt include it. Anyone have thoughts on that? Thanks again for the spreadsheet too! I’ve recreated it and included an amortization spreadsheet on the next sheet in order to easily populate the “Equity Accrued” boxes. This will also prove useful if/when I include any mortgage interest deduction.
    Benjamin Molina from Sacramento, California
    Replied almost 4 years ago
    Answered my own question from the IRS website. https://www.irs.gov/publications/p527/ch01.html Is there anything more exciting than finding little-known tax breaks contained in IRS Publications? I posit: no. No there is not.
    Benjamin Molina from Sacramento, California
    Replied almost 4 years ago
    Another question: in calculating Accumulated Return can I include my down payment to account for the amount of equity I “purchased” up front? There must be an accounting method to enable to comparisons of different investments.
    Geoff Bishop Real Estate Agent from Tampa, FL
    Replied almost 4 years ago
    Why doesn’t the Cap Rate formula include closing costs? Are we assuming that the closing costs will be financed? Is that typically what is done on investment property? (Excellent post. Thank you!)
    Geoff Bishop Real Estate Agent from Tampa, FL
    Replied almost 4 years ago
    @J Scott Thank you very much for this excellent introduction. Does the following graphic correctly capture the different inputs and outputs (terms)? https://drive.google.com/file/d/0Bx-opVXZAT9lei0xa0c0aF9LU00/view?usp=sharing Or can you suggest another resource that depicts these concepts graphically? Thanks!!
    Misha H. from Los Angeles, California
    Replied almost 4 years ago
    This is exactly what I was looking for. Thanks so much!
    James Seier
    Replied almost 4 years ago
    Is there anywhere on bigger pockets to download the property analyzer spreadsheet that you used in the full financial analysis? Thanks, James
    Kyle Murphy Rental Property Investor from San Ramon, CA
    Replied over 3 years ago
    Love the information and organization of this post!
    David Bailey Real Estate Agent from Atlanta, Georgia
    Replied over 3 years ago
    Would you include depreciation in your return calculations if making presentation to an investor?
    Stuart Young
    Replied over 3 years ago
    Good article with transferable advice for us in the UK. One thing I didn’t understand was the total cost in your initial table was $118,000 not $98,000 – why was that?
    Tianna S Talley from Orlando, FL
    Replied over 3 years ago
    Great article! Could you explain what the equation is to getting the mortgage payment of $2,129? I may be overthinking this but that is why you should ask if ya don’t know! 🙂
    Cynthia Byrd from Miami Beach, Florida
    Replied over 3 years ago
    Hey J…quick question. How did you calculate Equity Accrual? Great Article!
    Aard-Jan Gaag from Almere, Flevoland
    Replied over 3 years ago
    The Equity Accrual = Total Mortgage a year – Interest of the Mortgage a year. Example: Total Annuity = 18,000 a year Interest = 12,000 a year Equity Accrual = 6,000 a year Hope it helped! AJ
    Aard-Jan Gaag from Almere, Flevoland
    Replied over 3 years ago
    The Equity Accrual = Total Mortgage a year – Interest of the Mortgage a year. Example: Total Annuity = 18,000 a year Interest = 12,000 a year Equity Accrual = 6,000 a year Hope it helped! AJ
    Ndy Onyido from Toronto, Ontario
    Replied over 3 years ago
    Thanks, J. This is a good summary of your book on flips…a recommended read for all RE investors….
    Aard-Jan Gaag from Almere, Flevoland
    Replied over 3 years ago
    Hi J Scott, I was wondering what you think about what rates I’m looking for by GRM, DSCR and Cost/Unit? What is a good number or % on average?
    Mark Elkhill from Smithfield, Virginia
    Replied over 3 years ago
    Great info in the article. However, I need some help. We have a Lead Manager beta tool to help us analyze properties. I am trying to figure it out and am wasting a lot of time. Is there a webinar or tutorial somewhere that will explain how to use it? Thanks….. Be Great~! Mark Elkhill
    Ma. Bella Bongcawel
    Replied over 3 years ago
    Thanks for this. This was very useful. I noticed that in the image of the excel you posted there is a little section for selling costs (in your excel at 7%). Would it be possible for you to show that part of the analysis, please? Thanks, Manuel
    Marti
    Replied over 3 years ago
    Any place we can find the excel you referenced to download? It’s awesome!
    Ashley Pride Wholesaler from Collegeville, PA
    Replied over 3 years ago
    This is an extremely helpful post. Thank you n
    Ashley Pride Wholesaler from Collegeville, PA
    Replied over 3 years ago
    This is an extremely helpful post. Thank you n
    Account Closed from Lawrenceville, GEORGIA
    Replied over 3 years ago
    Great post. extremely helpful and well explained. Can anyone explain to me how to calculate the appreciation and the equity accural
    Kenneth King Buy and Hold Investor from Maitland, Florida
    Replied over 3 years ago
    Thank you, this is great information. I’m new to this site and so far it is sooo helpful!
    Nathan Moore Professional from San Diego, California
    Replied over 3 years ago
    Great Article!! thanks so much! I am curious though as to why the ROI calculation (ROI=cash flow/investment basis) uses the cash flow, but the Total Return calculation uses NOI. On the total return calculation, which includes equity accrued, wouldnt it also be prudent to include the cost of the debt servicing? Thanks again!
    Denise
    Replied over 3 years ago
    I ?lways was interested ?in this su?ject and ?till am, thank you for putting up.
    Joe
    Replied over 3 years ago
    You’re surprised and pleased that he is proclaiming to offer you something more than you expected. They don’t anticipate they’ll bee over-charged, for an inadequate product wjich is shipped late, by way of a rude employee. Oregon simply were required to reason Auburn for two main:33 as well as allow the diversion use too overtime.
    Marcello Scotto from Staten Island, New York
    Replied about 3 years ago
    Great & very well written, I just have a very simple question to ask. In Total ROI how did you calculate that the equity accrued in the first year of the mortgage is $3251 ?
    Jane
    Replied about 3 years ago
    Wonderful post however I was wondering if you could write a litte more on this subject? I’d be very grateful if you could elaborate a little bit more. Cheers! Reply Report comment
    Jane
    Replied about 3 years ago
    Wonderful post however I was wondering if you could write a litte more on this subject? I’d be very grateful if you could elaborate a little bit more. Cheers!
    Josh Smalley from Arlington, WA
    Replied about 3 years ago
    Newbie here and something is just not clicking for some reason. In this post, the ROI and the COC are the exact same formula. Elsewhere I read, I see these as two separate numbers/calcs. What on earth am I missing here? Are they synonymous or not?
    Davina M. from Phoenix, Arizona
    Replied about 3 years ago
    Thanks for the info. Its exactly what i was looking for.
    Roberto Santana from Gurnee, Illinois
    Replied about 3 years ago
    This is amazing!! Is there any way to get a PDF Version of it?
    dominic
    Replied about 3 years ago
    Loving the Pets, Hating their Fleas – Perhaps the reality or perhaps the philosophy of ‘the yin as well as the yang’ is certainly correct in humans’ day to day lives. Use a step-ladder, if you don’t really want to star inside the annual Darwin awards. These pipes are what permit you to get water whenever you turn around the faucet, washing machine, hose pipes, or whatever you decide and have in your home.
    Doug Gossom Real Estate Agent from Dallas, Texas
    Replied almost 3 years ago
    Thanks! Great guide for a complete newbie. I’m and agent with an investor who is looking to buy properties and needed this launch pad. I know what I need to become proficient in.
    Gregory Massi Investor from Mahopac, NY
    Replied almost 3 years ago
    This is a great article – i have a question relating to the Cash on Cash Return. Should the taxes you pay at closing should be excluded from the “initial investment” as this is already being captured in the “cashflow”? To clarify, these are taxes that are being escrowed for future payment..not back taxes.
    Felix
    Replied over 2 years ago
    He would certainly have happily paid me $100 for the referral – also offered to. However, my deal of goodwill in declining that $100 will net me a whole lot extra in future organisation than simply $100 single. I don’t want him to assume that each time I do a support he owes me loan. I intend to develop that support bank so he owes me prefers and also has no other option yet to pay those prefers back in the means of recommendations and/or future company. As well as, because he currently recognizes I’m not mosting likely to tear him off, he’ll maintain returning for life!
    Nicholas Sheridan, Jr. Investor from Denver, CO
    Replied over 2 years ago
    @J Scott Wow, I can’t thank you enough for writing this! This is the reason that I will be a BP follower for life.
    Nikostratos Vardakis
    Replied over 2 years ago
    Wow, thank you Scott! All together in few words, great job you have done. I wonder if I can use it in Switzerland were a 3 bedroom flat costs about 600.000 and the rent of it about 2.000 … By the way, happy new year to all of you in BP.
    Dale Kuhn from Norwich, Connecticut
    Replied over 2 years ago
    Thanks again J. Your post really helped to expand upon some great analysis. The thoroughness in explaining all the terms used much appreciated.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied over 2 years ago
    “As might now be obvious, cash flow is the total profit you will see at the end of the year from this property” No, cash flow is not total profit. Net Income or profit in the statement of operations measures earnings and has nothing to do with cash flows. Earnings can include accounting and tax treatment deductions that do not involve cash. The cash flow statement provides an accounting of aggregate data regarding all cash inflows received as well as all cash outflows. This does not include phantom GAAP accounting or tax treatment items deducted from Net Income. I don’t believe capitalization rate is the gospel of financial analysis for investment in rental property. Using the in place GSI compared to market GSI a revisionary capitalization rate can be calculated to provide some idea about the subject property performance compared to other properties in the market. as an investment analysis tool it is extremely limiting. Capitalization rate is an index. An index is only valuable when compared to other data points in the market. Capitalization rate fails to account for GAAP accounting and tax treatment items to calculate cash flows and ROI using discounted cash flow techniques such as IRR and NPV. Both of which measure the compounded interest rate of the cash flows. Countless times I find investment opportunities with good in place or revisionary capitalization rates and low Internal Rate or Return (IRR). key is finding investment opportunities with discounted cash flow analysis intrinsic value higher from than the sales price. You can’t do that with capitalization rate. many intrinsic value opportunities have not so good capitalization rates.
    Anthony Capozzi from Dover, New Hampshire
    Replied over 2 years ago
    Great blog post! You’ve provided a great RE analysis overview for newcomers! Thanks so much!
    Joel Montano from Raleigh, North Carolina
    Replied over 2 years ago
    Wow, this information is absolutely wonderful. There is so much information in this post, that I was forced to write notes, thank you. I’ll be sure to check out your books, definitely a great mentor for newbies like myself. Coming in late has its benefits due to the reservoir of Q&As that I can go over.
    Greg Teamann from Mars, PA
    Replied about 2 years ago
    Very helpful, thank you for this post, helps make the BP calculator more understandable.
    Diana Duncan Real Estate Investor from Miami / Fort Lauderdale, FL
    Replied about 2 years ago
    Nice article J Scott, thanks for sharing. I’ve never been a fan of mind boggling spreadsheets, too many numbers, although I realize that numbers are an essential part of a successful RE Investor’s tool kit so I embrace them wholeheartedly.
    Stephanie Owens from Central Islip, NY
    Replied almost 2 years ago
    wow!!! what a great article. Thank you soooooo soooo much.
    Mark A Rose
    Replied almost 2 years ago
    My wife and I currently own a home in a great neighborhood. We purchased the house 5 years ago but had to move due to work. We have been renting the house for 2 years with a net income of approximately $4000 per year (-mortgage/management/maintenance). Our house recently appraised for about 100k more than we paid. My question is, should I sell for a net profit of 100k or continue to rent? My thought is if i sell and pocket 100k cash, I could use that money to possibly purchase two or three rental properties in the area and possibly increase my total cash flow. Or should I continue to rent and try and refinance to come up with additional cash to invest with? Thanks.
    Justin Johnson from Fort Smith, AR
    Replied over 1 year ago
    J Scott, I do have some questions about this article. I have read, and re-read (about 4 times now), this article and I am currently using an almost identical analysis worksheet at the moment. My questions are: 1) You are calculating the utilities at the annual level and not monthly, is this just an average utility cost figure that you come up with? 2) Why are the utilities being calculated on this, are you your own tenant (househacking) or paying utilities as a luxury for your tenants? 3) Is there a different way to analyze a property for househacking to find a deal? 4) How in the world do you keep your annual utilities so low?! lol This has been one of my favorite and one of the most helpful articles I have read since joining BP and I am really trying to dig into the analysis part right now. I know I can use the calculators on BP to do the analysis for me, but I still believe in *knowing* what’s going on behind the numbers even when I use a calculator, I want to be able to do them by hand if I have to. Thank you so much for this great article!
    J Scott Developer from Sarasota, FL
    Replied over 1 year ago
    Hey Justin, These numbers are just for example purposes. That said, I often don’t pay utilities for my tenants, but do have to pay utilities between tenants, when the property is empty. If I have a one month vacancy every 18 months, that’s a few weeks per year of utilities on average, for each unit. Depending on the time of year, that can still be a couple hundred dollars per unit. As for house hacking, use the same analysis, but subtract out whatever income you’re not receiving from the rental income because you’re living in that unit.
    Morgan J Moss from Boynton Beach Florida
    Replied over 1 year ago
    This is great, where could I find some material if I wanted to take a deep dive into this topic?
    Taylor Knott from Blue Lake, CA
    Replied 12 months ago
    Wow I love math and this was an amazing article. I was just thinking I need to understand how to analyze deals and what that entails. Insert this link I found in the beginners guide really taught me a lot. Thank you for your contribution. Amazing how these articles provide such depth of knowledge and nuance that would be hard to find. -Taylor
    Garland Trice
    Replied 11 months ago
    Wow, I've been so intimidated by RE for so long. Sat down for a few hours today, soaked all of this up and and super inspired! I know it's not everything I need, but excited to continue to learn the ins and outs after this crash course. Thanks!
    Angela R.
    Replied 10 months ago
    Do you have a link for the Spreadsheet template you featured in article? Would love to use it
    David Chriswick from Chicago, IL
    Replied 10 months ago
    Me too. You receive anything or find something similar yet? thanks
    David Chriswick from Chicago, IL
    Replied 10 months ago
    I'm just starting out and learning as much as i can before looking for my first deal. This is great. Thank you! Is it possible to have a copy of your spreadsheet to play around with and practice? - it's so good to see everything in one page, with numbers changing as the variables change - great tool to learn. Dos anyone have this or something like it they are happy to share with me? thank you!!
    Account Closed Attorney from Na
    Replied 10 months ago
    Thank you so much for sharing your expertise!
    Anthony Morales
    Replied 9 months ago
    This article was clear, concise, and all around awesome. Thank you for "simplifying" the math!
    Dakota Bernhart from Houston, Texas
    Replied 8 months ago
    This article was extremely helpful, I'm in the process of reverse engineering the Excel file and I'm stuck on how you figured out your equity. Again the article was super helpful, and hopefully someone will see this and help me plug in the last puzzle piece I need.
    Aaron Compton New to Real Estate from Jacksonville
    Replied 3 months ago
    https://www.biggerpockets.com/forums/109/topics/126628-how-to-calculate-equity-accrual Hey Dakota, I was wondering the same thing and wouldn't you know it I googled it and it brought me right back to another Bigger Pockets article. Hope this helps.
    Ed Moore from Thousand Oaks, Ca
    Replied 6 months ago
    Excellent article. I have decided to become and investor in Multi Family properties. I have been reading a lot, and listening to Podcasts. This has really explained Deal Analysis and clarified some of the terms which were not completely clear to me until now. Thanks for sharing your expertise.
    Ronnika Dillon Investor from Northeast Florida
    Replied 6 months ago
    Thank you for sharing! This is an awesome article that really explained the "meat and potatoes" for analysis of multifamily investing. You are greatly appreciated!
    Rafael R. from Hamilton, ON
    Replied 4 months ago
    Thank you.. very informational.
    Aaron Compton New to Real Estate from Jacksonville
    Replied 3 months ago
    One of the easiest-to-read articles I've ever read on deal analysis. Really informative and I walked away with pages of notes and helpful things to help me to look at deals. Thank you.
    Jerry Akia from Los Angeles, California
    Replied 2 months ago
    How did you come up with the equity accrued amount ($3,251)? is there a formula for this?
    Kent Gushow
    Replied 2 months ago
    Very well written article that summed up an entire 300 page book I recently read.
    Barry H. Investor from Scottsdale, AZ
    Replied about 1 month ago
    Wow.... I guess this article was actually written 10 years ago? I seller-finance all my turn key rentals in Kansas City MO. I am able to provide one number....TOTAL ROI.....based upon zero appreciation and an Interest only loan. It is strictly a Cash Flow model with no anticipated appreciation, so if there is appreciation, it is a bonus. My Buyer/ Borrowers can expect 20%+ annual Total ROI inclusive of all loan costs and all possible expenses. Your summary is excellent, but as an Invedtor, I just want to know how much cash is going to be in my bank account at the end of the month or at the end of the year.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied about 1 month ago
    This is one of the better articles I have read. It does have misstatements that can create some confusion. “You see, technically, cash flow is: Income – Expenses = Cash Flow”. That statement is not correct. Income and expenses are found in the statement of operations or what is commonly called the income statement or profit and loss statement. it has nothing do to with cash flow. Income less operating expenses = Net Operating Income or NOI. Cash flow is calculated on the statement of cash flows. The statement reports all cash inflows and all cash flows. Those two statements are commonly combined into a shortened version for real estate. “Unlike NOI, cash flow also includes your debt service under “expense.”” Partially correct. Cash flow does include the annual debt service. It is incorrect to call it expense. The annual debt service is mostly a balance sheet transaction. There is the balance sheet part of the transaction reduction of cash for the annual debt service. There is the balance sheet transaction reduction of the loan balance for the principal portion of the payment. There is the statement of operations transaction increasing interest expense. “If we included debt service in the NOI, then NOI would only be meaningful for that specific loan.” Never include any ADS in NOI. ADS is cash flow not statement of operations which is income and expenses. You might choose to include interest expense in the NOI. That would render the capitalization rate useless. Capitalization rate is not a measure of ROI. Capitalization rate measures the investment’s NOI as a function of the price which is not ROI. All ROI calculations involve cash flows not NOI. Cash on cash is an oversimplified ROI calculation that does not include the time value of money as does IRR and NPV.
    Karina Gomes from Miami, FL
    Replied 29 days ago
    Thank you! this is a fantastic guide to a newbie!
    Lister Kom
    Replied 26 days ago
    This a really great article. Everything is laid out so clearly. One bit of confusion, for the Total ROI calc, aren't you double counting, if you add property appreciation and equity. Doesn't equity come about, because there's property appreciation?
    Paris Capers New to Real Estate from Chula Vista, CA
    Replied 11 days ago
    As others have pointed out, the fact that this article was written ten years ago is impressive. I think this warrants my first post EVER to sing it's well deserved praises. As a long time lurker, and first time investor, I think that all new-joins ought to be directed HERE. FIRST! This is exactly where I needed to be!

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