Real Estate Investing Basics

The No. 1 Skill Most New Investors Lack (But Should Absolutely Learn)

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
132 Articles Written
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Many new real estate investors are intimidated by data. But the math and data side of real estate investing is—by far—the easiest part to learn.

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Easy enough to learn in a single sitting, in fact.

But simple as it is, it's also one of the most important skills to possess. Understanding how to evaluate and analyze basic data points related to market analysis, rent comps, and cash flow can mean the difference between making or losing thousands of dollars each year as an investor.

Sad to say, it’s one of the core real estate investing lessons I wish I’d learned earlier. It would have saved me tens of thousands in losses.

Invest an hour or two to learn how to accurately calculate rental cash flow, and you’ll never make a bad investment again!

Crucial Data Points

When you have accurate data to work with, you can run the numbers and predict your returns on a rental property. The calculations only require third-grade math, but the end result is only as good as the numbers you plug in.

This is why you need to know how to collect accurate data in the first place.

Property Values

No matter what kind of real estate investing you do, it all starts with understanding local property values.

If you flip homes or invest using the BRRRR method, you need to know how to estimate the after-repair value (ARV) of a property. Get it wrong, and you could lose money rather than earn it.

Imagine you plan to buy a property for $100,000 and put $50,000 into renovating it, with another $25,000 set aside for carrying costs and both rounds of closing costs. If you estimate the ARV at $210,000, but you get it wrong and the real ARV is only $170,000, then congratulations! You just wasted months of hard work just to lose $5,000.

That miscalculation affects you just as much if you'd planned to refinance and keep the property as a rental. The lender will offer you a far lower loan amount, which may not cover your needs.

Learn how to review comps, and always get at least one or two second opinions from disinterested third parties. With thousands of dollars on the line, don’t guess—know.

business, accounting, finances and people concept - confused man with calculator at home

Market Rents

The same comp analysis logic applies to rents. You need to know exactly what the property will rent for, before sinking a penny into it.

Say you take out a loan to buy a property, paying $450/month in principal and interest. Your non-mortgage expenses come to another $450/month (more on that calculation later).

At $1,000 rent, you earn a modest profit. At $850, you lose money every year. That’s called a liability, not an asset.

Master the science of analyzing fair market rents. Again, get second opinions from other local investors, property managers, and real estate agents. Your own forecasts, particularly as a new investor, can be tainted with green-colored lenses; recognize the risk and have the maturity to ask for others’ opinions.

Related: Rental Property Numbers So Easy You Can Calculate Them on a Napkin (With Real-Life Example!)

Local Population Growth

Rental properties are long-term investments. Even if you estimate today’s rents precisely, market conditions change, driven largely by local demand for housing.

Fortunately, demand can be measured. To get a sense of the trending direction and speed, look at recent population growth.

Make no mistake, it’s a past-oriented metric. As investment brokers love to point out, “Past performance is not indicative of future results.” But it gives you a sense of the current population change trend.

Not convinced of the importance of population trends on real estate? Baltimore—where I’m from—was once home to a million residents. Population then shrank for decades, due to rising crime rates and corruption. Today, around 600,000 people live within city limits, occupying only 60% of its housing capacity.

As you can imagine, it has the most affordable real estate of any city of its size along the East Coast “super-metropolis” corridor.

Check the Census Bureau for official numbers, but you can also find population growth and other real estate-related data elsewhere online.

Local Job Growth

If population growth serves as a lagging indicator of housing demand, job growth comes closer to an indicator of future housing demand. The line from Field of Dreams rings true when it comes to unfilled jobs: “If you build it, they will come.”

You can find (somewhat) recent job growth data from the Bureau of Labor and Statistics. But keep an eye out for other sources of local job growth statistics, as well.

People follow jobs. And when they show up, they’ll need a place to live, the influx of demand driving up values and rents.

Young couple cleaning and selecting things at they new home.Movi

Local Vacancy Rate

Another indication of housing demand, you need to know a property’s vacancy rate as a rental property expense for calculating cash flow. While the citywide vacancy rate matters, you should drill down to the neighborhood level to plug into your rental cash flow calculator.

You can check official home vacancy rates, of course, through the Census Bureau and other sources. But often you can get a better current sense for a neighborhood’s vacancy rate from other landlords, property managers, and real estate agents who work there.

As a new investor, I’d be wary of any neighborhood with vacancy rates over 5%.

Related: How Data Analysis Can Make You Rich in Real Estate Investments

Other Property Expenses

I cringe every time I hear a new investor say, “Well, the rent is $1,500, and the mortgage is only $1,200, so I’ll make $300 cash flow every month!”

That investor is about to lose their shirt.

As a general rule, rental properties come with non-mortgage expenses that add up to around 50% of the rent (known in the industry as the “50% Rule”). Those expenses include, but aren’t limited to:

  • Vacancy rate
  • Repairs and maintenance
  • Property management costs (ongoing, plus new tenant placement fees)
  • Property taxes
  • Property insurance
  • Rent default insurance (if you buy it)
  • Condo or HOA fees (if applicable)
  • Accounting, legal, travel, and other miscellaneous expenses

And don’t tell me you don’t have to account for property management fees, since you plan to manage the properties yourself. That works great… until you take a new job and don’t have time, or give birth to triplets, or just can’t take another phone call from a tenant asking you to screw in a new lightbulb for them. For that matter, you may simply reach the maximum number of self-manageable rentals and run out of hours in the day.

All of the above are ongoing costs, and say nothing of one-time costs. For example, if you buy a fixer-upper, you’ll have renovation costs. You need to accurately estimate the HVAC costs or fire damage restoration costs or whatever else it takes to rehab the property.

Then there are the closing costs, both on the front end when you buy and the back end when you sell. You'll have lender fees, title fees, government recordation fees and transfer taxes, real estate agent commissions, appraiser fees, and beyond.

You need to know how to forecast them all, if you want an accurate prediction of your returns.

Get Past the Intimidation by Familiarity

It’s intimidating at first, looking at all these numbers. Fortunately, there’s a quick way to move past that initial overwhelm: get familiar with them.

To get a sense for how rental expenses impact cash flow, play around with a rental cash flow calculator until it becomes intuitive. Try different prospective properties, different prices, different scenarios.

Spend a half-hour researching the population and job trends in your target market. Ask around about vacancy rates. Research local comps, both for home prices and rents. As my old friend used to say, “It’s not rocket surgery.”

Familiarity doesn’t breed contempt; it breeds comfort.

What data points do you find intimidating as a new investor? How do you plan to get over that intimidation?

Share in a comment below.

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their ...
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    Luis Vaca from Oxnard, California
    Replied 3 months ago
    Good article and very helpful with the links provided. Also verify those pesky property taxes and how much they will increase before purchasing a property!
    G. Brian Davis from Baltimore, MD
    Replied 3 months ago
    Thanks Luis, and great point about property taxes!
    Justin Mason
    Replied 3 months ago
    Good article, do you invest in Baltimore since there is high crime and a population decline as you say?
    G. Brian Davis from Baltimore, MD
    Replied 3 months ago
    Thanks Justin, no I don't invest there anymore. I originally invested there because on paper the numbers look good, and I didn't know any better. I was also young and naive and had delusions that I would be making a difference in improving bad neighborhoods. All I did was overimprove the properties, get broken into, and lose money.
    Christopher Stacy Rental Property Investor from Wiesbaden Germany
    Replied 3 months ago
    Good run down Brian. I like the links to other resources. Makes it easy to find analysis tools without making the article too long. TLDR is a problem with many folks and keeping the article at just the right length won't turn people off. Thanks!
    G. Brian Davis from Baltimore, MD
    Replied 3 months ago
    Thanks Christopher, glad it was useful for you!
    Eric Lilly
    Replied 3 months ago
    "Familiarity doesn’t breed contempt; it breeds comfort." Love it.
    G. Brian Davis from Baltimore, MD
    Replied 3 months ago
    Haha, thanks Eric!
    John Grisell Investor from San Antonio, Texas
    Replied 3 months ago
    So I have this property in San Antonio. Duplex with 2/1.5, 1 carport. Price is $200K, combine rent is $1800/m. How could this work in a normal world? My thinking is if all goes as "normal" I'll lose about $100-200 per month. What do y'all think?
    G. Brian Davis from Baltimore, MD
    Replied 3 months ago
    Personally, I don't buy any properties with negative cash flow. Appreciation is nice, but you can't count on it.
    Joseph Cacciapaglia Real Estate Agent from San Antonio, TX
    Replied 3 months ago
    Why do you expect to lose money each month with $1800 in rents? That's a 0.9% property, which is not bad at all here. I have clients that buy duplexes and fourplexes here in SATX with rent to price ratios as low as 0.85% and they are still slightly positive. Are your expenses high, or are you highly levered? Even if you are losing slightly, with our rent growth, you should fine in just a couple years, as long as you picked a good area.
    Ken Goodman Investor from Los Angeles, California
    Replied 3 months ago
    Hi Brian, what's your opinion about the Loch Raven Village area outside Baltimore? Our rentals there are cash flowing very well but we have been watching the market values sinking over the past two years. What's going on?
    G. Brian Davis from Baltimore, MD
    Replied 3 months ago
    Hi Ken, the Baltimore metro area has weak housing demand because it has slow, if any, population growth. It comes down to a judgment call on your part, whether you feel the prices will stabilize, and that the rents will at least keep up with inflation. Best of luck!
    Nathan G. Real Estate Broker from Cody, WY
    Replied 3 months ago
    Nice blog, Brian. I see a lot of people fail to learn the basics and make these all-too-common mistakes. Thanks for sharing!
    G. Brian Davis from Baltimore, MD
    Replied 3 months ago
    Thanks Nathan, much appreciated!
    Kwambe Smith Specialist from Georgia
    Replied 3 months ago
    Thanks Brian for that insightful blog. My wife and I are looking to purchase a rental property in the upcoming months. As a new investors to real estate, this information is a godsend. Much appreciated!
    Ben Walters New to Real Estate from San Francisco, CA
    Replied 3 months ago
    Thanks Brian! Very helpful.
    David Klein Investor from Concord, NC
    Replied 3 months ago
    Nicely stated Brian! I would add to everyone's equations: subtract your emotions! If you follow Brian's recommendations, have fairly accurate numbers, and remain unemotional, you have a much greater chance of success. The numbers don't lie. Do not try to "fudge" the numbers by estimating income on the high side and expenses on the low side. This will lead you down the path to losing money. Estimate income on the low side and expenses on the high side and walk away from the deal if it doesn't work. We have all wanted a deal to work "emotionally" and put on the rose colored glasses and lost money by "fudging" the estimated income and expenses. Thanks Brian!
    G. Brian Davis from Baltimore, MD
    Replied 3 months ago
    So true David, thanks for reinforcing that point!