{"id":96364,"date":"2018-01-30T11:40:36","date_gmt":"2018-01-30T18:40:36","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=96364"},"modified":"2023-03-30T09:55:17","modified_gmt":"2023-03-30T15:55:17","slug":"sample-property-analysis","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/sample-property-analysis","title":{"rendered":"Help Me Analyze This Real-Life Deal That Just Came Across My Desk!"},"content":{"rendered":"

The following numbers are not made up\u2014this is an actual deal that came across my desk just recently, and you are going to help me analyze it!<\/p>\n

(The address has been changed to protect the innocent!)<\/p>\n

First, let me tell you a bit about 123 Main Street, as seen below.<\/p>\n

\"\"<\/p>\n

Step One: Figure Out Total Project Cost<\/h2>\n

The first step in analyzing this property is to find out our total project cost.<\/p>\n

In other words, how much is this property going to cost to buy, fix up, and get rented?<\/p>\n

Four values typically help us determine the total project cost:<\/p>\n

    \n
  1. Purchase Price:<\/strong> <\/em>This is pretty self explanatory, but the purchase price is the actual amount you will pay for the property. This is not necessarily the asking price or what it\u2019s worth. This is what you will actually pay. In the case of 123 Main Street, I\u2019ll use a value of $75,000. (They are asking $77,000, but it\u2019s been on the market for 21 days, so I think they\u2019ll go down a little.)<\/li>\n
  2. Purchase Closing Costs:<\/strong> <\/em>The purchase closing costs are all the costs associated with the purchase transaction. Included might be loan points, loan origination fees, prepaid insurance, prepaid property taxes, title and escrow fees, recording fees, attorney charges, and other fees custom to your area. In my experience, these purchase closing costs usually average around $1,500 for a $100,000 property, plus any fees added by your lender. In the case of 123 Main Street, it\u2019s fairly inexpensive, but I know that I would likely be obtaining a loan, so I\u2019m going to use $2,500 as my purchase closing costs.<\/li>\n
  3. Pre-Rent Holding Costs:<\/strong><\/em> In other words, how much will I need to pay monthly for this property before I can get it rented? Enough for two months? One month? Because you won\u2019t likely have a renter the first day you buy it (especially if it needs a lot of repairs), you should be sure to account for any holding costs. These costs will likely be the mortgage, taxes, insurance, and utilities. For this property, I think it could be rented within two months, so I\u2019m going to use a nice round number of $1,200 here.<\/li>\n
  4. Estimated Repairs:<\/strong> <\/em>How much work does this property need before it\u2019s rent ready? Let\u2019s do a quick preliminary analysis of the repairs needed. Right now, you may not have even been to the property, so you might need to make some assumptions. Once you\u2019ve walked through the property, you\u2019ll be able to refine those assumptions to be much more accurate. Then, after the inspection and bids from contractors, you\u2019ll be able to get even more specific.<\/li>\n<\/ol>\n

    To help estimate the rehab budget, I recommend filling out the following form with your best estimates. These are the 24 main categories of repairs you\u2019ll likely face when estimating the repairs. As you can see in this chart, I\u2019ll use $17,250 as our total repairs needed.<\/p>\n

    \"\"<\/p>\n

    At this point, we have everything we need to estimate the total cost of the project:
    \n\"\"<\/p>\n

    At this point, we can see the total amount we\u2019ll have in this property and can compare this with other homes selling in the area. After all, a fixer-upper like this house doesn\u2019t make sense if all the other homes that are already fixed up cost around the same price (after all, why go through the hassle of a rehab if you aren\u2019t getting something for your work?). In this case, however, I can see numerous examples of similar fixed-up properties selling in the $110,000 to $130,000 range, so I actually expect the ARV (after repair value) for this property to be approximately $120,000. So far, so good.
    \n
    \nRelated:<\/strong> Case Study: A 7-Unit Multifamily Financial Statement Analysis [Real-Life Example!]<\/a><\/em><\/p>\n

    Step Two: Figure Out the Financing and Total Cost Out of Pocket<\/h2>\n

    Next, we want to determine how much the financing on this property will cost us each month. If you plan to pay 100% cash for the property, then you can skip this step. However, if you plan to use a loan, we\u2019ll need to know how much it\u2019s going to cost each month. Let\u2019s just look at the underlying math.
    \nTypically, a bank will require a 20% down payment on a rental property like this, with some banks requiring 25%. In addition, they will likely not cover the repairs, pre-rent holding costs, or the closing costs. Instead, they will base that 20% or 25% on the purchase price alone. In this case, the purchase price we are analyzing for is $75,000, so a 20% down payment would mean our loan is for 80% of the purchase price.<\/p>\n

    \"\"<\/p>\n

    Our loan from the bank will therefore be for $60,000, and we will need to pay $15,000 for a down payment. Now, to determine the total amount of cash we\u2019ll need to have to make\u00a0this deal a reality, we simply need to subtract the loan amount from the total
    \nproject cost.<\/p>\n

    Total Project Cost – Loan Amount = Total Cash Needed<\/p>\n

    In the case of 123 Main Street, we know that the total project cost is $96,950, so $96,950 – $60,000 = $36,950
    \nTherefore, to buy this property with a 20% down payment loan, and to cover repairing the property, closing costs, and pre-rent holding costs, we\u2019ll need approximately $36,950 in cash. Before you start with Negative Nancy thoughts like \u201cI don\u2019t have $36,950!\u201d continue reading. There are numerous ways to finance real estate, including a lot of creative methods that don\u2019t require a full 20% down payment. There are also ways you can include the repairs in the cost of your loan.<\/p>\n

    Step Three: Calculate the Monthly Mortgage Payment<\/h2>\n

    To calculate the monthly mortgage payment, you\u2019ll need to use a mortgage calculator; the calculation is impossible to do in your head but exceptionally
    \neasy to do online through one of millions of online mortgage calculators. To calculate the mortgage, you\u2019ll need three numbers:<\/p>\n

      \n
    1. Loan Amount<\/li>\n
    2. Loan Period (length)<\/li>\n
    3. Interest Rate<\/li>\n<\/ol>\n

      The loan amount we have already determined, so we just need to know the length and the rate. Although mortgages come in all shapes and sizes, 30 years is the most common, though some people do choose 15. For our purposes, we\u2019ll choose 30. As for the rate, it changes daily and depends on numerous factors, so your best bet is to call a few local banks and ask them where current rates are for non-owner-occupied properties. Today, those rates hover around 5%, so that\u2019s the number we\u2019ll use.<\/p>\n

      Now we simply need to plug our values into the mortgage calculator to determine our mortgage payment. Some mortgage calculators, such as the BiggerPockets Mortgage Calculator<\/a>, allow you to include annual taxes and insurance with the payment, but we will include those items later in our\u00a0discussion on expenses, so we\u2019ll leave them blank here.<\/p>\n

      As you can see below, our expected mortgage payment will be $322.09.<\/p>\n

      \"\"
      \nStep Four: Determine Total Income<\/h2>\n

      What do you think our 123 Main Street property will rent for?<\/p>\n

      That\u2019s kind of a silly question, isn\u2019t it? After all, you know nothing about the area! Remember, trying to determine the fair market rent depends on numerous factors, including location and characteristics of the property.<\/p>\n

      A quick scan of Craigslist and the local newspaper for this area shows us that prices for 3-bedroom homes in this neighborhood are renting for between $975 and $1,350 per month. The higher end of that spectrum seems to be nicer homes that have been rehabbed, whereas the lower end seems to be more in line with houses that need a ton of work. Since 123 Main Street will be rehabbed, you can expect it to get near the top of that range, but we also don\u2019t want to price it too high in our estimates. So let\u2019s shoot for a $1,200 per month price for fair market rent.<\/p>\n

      With this property, there are no obvious extra ways to make more money\u2014no laundry machines, no storage buildings, etc. Therefore, we can move on.<\/p>\n

      Total monthly income: $1,200<\/p>\n

      Step Five: Determine Total Expenses<\/h2>\n

      Next, we need to nail down the expenses for 123 Main Street. To do this, let\u2019s take another look at that list of all possible expenses and determine which ones we might need to pay as the landlord.<\/p>\n

      \"\"<\/p>\n

      According to our graph, we can estimate $902.27 per month in expenses for 123 Main Street. Of course, we would also want to check to make sure there were no other special expenses unique to this location or this house, but we\u2019ve done that homework and are comfortable with this number.<\/p>\n

      Our total expenses: $902.27<\/p>\n

      Step Six: Evaluate the Deal
      \nWe now have all the numbers needed to make a decision on this property.<\/p>\n

      Total Monthly Income: $1,200.00
      \nTotal Monthly Expenses: $902.27<\/p><\/blockquote>\n

      To determine our cash flow, we subtract the expenses from the income:<\/p>\n

      $1,200.00 – $902.27 = $297.73<\/p><\/blockquote>\n

      Therefore, we can estimate that per month, 123 Main Street will produce approximately $297.73 in cash flow, on average, over time. To get the annual cash flow, we simply multiply this number by 12:<\/p>\n

      $297.73 x 12 = $3,572.76<\/p><\/blockquote>\n

      Now we want to determine what kind of ROI this cash flow represents.<\/p>\n

      To do this, we simply need to divide the annual cash flow by the total invested capital.<\/p>\n

      Annual Cash Flow \/ Total Invested Capital = CoCROI<\/p><\/blockquote>\n

      We determined back in step two that the total invested capital on this project would be $36,950.00. We\u2019ve also estimated the annual cash flow to
      \nbe $3,572 .76. Therefore,<\/p>\n

      $3,572.76 \/ $36,950.00 = 9.67% CoCROI<\/p><\/blockquote>\n

      In this example, we could estimate that this property, with this cash invested, should return around 9.67% on our money. Remember, however, that this does not take into account the fact that the loan is being paid down each month, that the home has some incredible equity built in (since we did a slight rehab on it), and that there may be other tax benefits to go with it, or that would at least minimize the tax we would need to pay on the property.<\/p>\n

      Let\u2019s take this one step further and try to determine our overall return (the ROI we\u2019ll see when we combine the cash flow, equity growth, and loan paydown over time). A 9.67% CoCROI might be a good number to know, but let\u2019s quickly compute the overall return on this property, assuming a few things.
      \n
      \nRelated:<\/strong>       How I Analyzed a Deal in 5 Minutes (& Bought it Before Anyone Else Could)<\/a><\/em><\/p>\n

      First, let\u2019s assume that we\u2019ll hold this property for five years and then sell.<\/p>\n

      Let\u2019s also assume that appreciation will increase the value of the property 2% per year over those five years. In other words, up in step one we determined that the property was worth $120,000. Therefore,<\/p>\n

      \"\"<\/p>\n

      At the end of year five, our property is worth $132,490. Of course, if we were to sell it, doing so would cost us some money. Again, we\u2019ll need to make a few assumptions. We know real estate agents will charge around 6% (roughly $8,000), and the other closing costs will likely run around $4,000. Plus, we\u2019ll probably need to do some cleaning up of the property, such as a new paint job. So let\u2019s add another $5,000 there. Our total sales expenses, at this point, would be $17,000.<\/p>\n

      Next, we simply need to determine how much the mortgage balance would be at the end of five years. Our initial mortgage, if you\u2019ll recall, was
      \n$60,000. However, we know that in five years, that loan will have been paid down some. To determine just how much, we need to use an \u201camortization calculator,\u201d which you can find easily online on a site such as       www.amortization-calc.com<\/a>. By doing this, I can see that at the end of year five,
      \nwe\u2019ll owe $55,004.72 on the loan.<\/p>\n

      We now have all the puzzle pieces needed to determine our overall return. To do this, we will want to find out exactly how much profit we made over those five years. This profit is spread among two categories: cash flow and equity. Let\u2019s look at equity first. The equity is the profit we\u2019ll get if we sell, not including any money we\u2019ve paid for a down payment. To determine this, we simply start with the sales price and deduct everything that has ever been paid for the property, including sales expenses, the loan payoff, and the total invested capital.<\/p>\n

      For 123 Main Street, these figures are as follows:<\/p>\n

      \"\"<\/p>\n

      Therefore, when we go to sell the property, we will have made a profit of $23,535.28. However, we are not quite done. We\u2019ve also made some good cash flow over the previous five full years. A few moments ago, we estimated that this property would produce $3,572.76 in cash flow each year. Knowing that we held on to the property for five full years, we can multiply that by five to get our total received cash flow:<\/p>\n

      $3,572.76 x 5 = $17,863.80<\/p><\/blockquote>\n

      So, we\u2019ve made $17,863.80 in cash flow over those five years and another $23,535.28 in equity over the same time frame, for a total of $41,399.08\u00a0in five years. But we are still not quite done. What does this actually mean?<\/p>\n

      Remember, the total return is the ROI we\u2019ll see when we combine the cash flow, equity growth, and loan paydown over time. It\u2019s similar to cash-on-cash return, but it includes all the profit made, not just the cash flow.<\/p>\n

      To determine our total return, we need to use the following formula:<\/p>\n

      \"\"<\/p>\n

      If this is confusing for you, let me try to explain in words what we are doing. Essentially, we are doing the same ROI calculation we\u2019ve done in the past, just taking profit divided by investment. However, because we are spreading this out over a number of years, we need to divide by that figure to likewise spread the investment out over a number of years. So, let\u2019s do this with 123 Main Street:<\/p>\n

      \"\"<\/p>\n

      Total return = 22.4%<\/p>\n

      We determined earlier that our total CoCROI on this property would be 9.67%, and now we can see that if our rehab caused the value to increase
      \nto $120,000, appreciation carried the value up 2% per year and we sold for full value in five years, after expenses we might expect a 22.4% overall ROI, on average, each year for the next five years. However, we\u2019ve made a number of assumptions that could or could not be true. What if appreciation carried the property\u2019s value up 5% per year? What if we received no appreciation?<\/p>\n

      What if we held on for ten years? Twenty years?<\/p>\n

      The point of this exercise is not to show you exactly what you will receive from a property, but to help you learn how to calculate these numbers.<\/p>\n

      If you want to get even more fancy, you can pull out the IRR (internal rate of return) or MIRR (modified internal rate of return), but those discus-
      \nsions are far beyond the scope of this article.<\/p>\n

      Once you have a firm grasp of why the numbers work the way they do, and you are able to do these calculations by hand, I encourage you to check out the BiggerPockets Rental Property Calculator at www.BiggerPockets.com\/analysis<\/a> to help you save a lot of time doing these numbers. Everything\u00a0we just went over can be done in just a few minutes on the calculator, and numbers can easily be adjusted and changed as needed. For example, if you wanted to know what would happen with a rehab budget of $30,000 instead of $17,250, you can simply edit the report and run the numbers again, rather than starting over at the beginning and going through the whole process. Online calculators, such as the BiggerPockets Rental Property Calculators, can help you out tremendously and save you a lot of time once you understand the basics of how they work.<\/p>\n

      \"\"<\/a><\/p>\n

      What do you think about this sample deal? Any questions about the analysis process?<\/em><\/p>\n

      Leave a comment!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

      The following numbers are not made up\u2014this is an actual deal that came across my desk just recently, and you are going to help me analyze it!<\/p>\n","protected":false},"author":710,"featured_media":86212,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4252],"tags":[],"class_list":["post-96364","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-deal-analysis"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/96364","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/710"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=96364"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/96364\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/86212"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=96364"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=96364"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=96364"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}