Running the numbers as a newbie, Cap ex, COC, NOI oh my!

19 Replies

HI BP Community. I've been following the forums for some time now and I would love some clarity about how investors are 'running the numbers'. Numbers have never been a strong point for me and I would like to improve this starting now. I understand there are different formula's that work for commercial, big MF and so on, so for example in this case I would like to determine what I would like to use to ascertain value in SF flips and small MF (less than 6 units). As a new comer trying to follow 1% rule, cap rate, CoC, NOI, 50% expense rule and so on and so on, can be mind boggling. So far it looks like everyone has their own way of calculating value and I'm not sure which way/s are best for me to use. I'd love to hear from more experienced investors in similar market class (SF flips and small MF buy and hold) about which calculations they use to give me a better idea of how to make sense of the numbers.

Hi, @Lauren Weiss ... this is a complicated question, because value varies based on an individual investor's goals and criteria, how they're financing, etc. For instance, a buy-and-hold investor who's criteria is 8% CoC return will value something differently than an investor who wants to achieve 12% CoC return. Or, if two buy-and-hold investors are both looking for 10% CoC return, but one is financing traditionally with 25% down and the other is able to use seller financing and only needs to put 5% down, the math will be very different between those two investors as well.

So, I would say start by trying to identify some criteria to help direct how you'll run your numbers (i.e. a certain CoC return or Cap Rate... you don't need specifics for EVERYTHING, but set a couple to guide you based on your long-term goals.). I know one big hurdle upfront is understanding how much to budget for expenses, rehabs, etc., so make sure you're networking with lots of other investors, property managers, contractors, etc. in your area and asking them about the numbers. No one person will have the perfect answer, but the more you talk with folks about the assumptions they make, the easier it will be for you to hone in on what assumptions you're comfortable using to run your numbers.

To make all this a bit more concrete, here's an example of some numbers I ran just this morning on a small MF buy-and-hold (which is the focus of my investing). There's a duplex in a solid B area listed for $179,900, in pretty good shape overall, and I believe I could rent each side for $1,000/month. While I'd love to branch out to seller financing or BRRRs eventually, the two properties I have so far have traditional mortgages, so let's assume I'd do the same on this. My criteria for buying are at least a 10% CoC return, and $100/month or more in net cash flow PER door (hopefully closer to $200/door).

List Price:  $179,900

Down Payment:  $44,975  (25% down, assuming I buy at list price)

Repair Estimate:  $5,000

Closing Costs:  $2,500

TOTAL CASH IN:  $52,475

Loan Amount:  $134,925

Loan Terms:  5.25% fixed rate, 30-year mortgage

Monthly P&I:  $745

Monthly Rents:  $2,000 ($1,000 per side)

Vacancy Loss:  $100/month (I estimate 5 - 8% on multi-family properties, depending on how popular the area is).

TOTAL MONTHLY INCOME:  $1,900 ($2,000 - $100 in vacancy)

Taxes:  $154/month (you can usually find the actual tax amount paid for the previous year on your city's website)

Insurance:  $100/month (ask other investors in your area what they pay, or for recommended agents who can give you quotes)

Water/Trash:  $80/month (this is typically paid by the landlord in my area)

Sewer:  $50/month (also typically paid by the landlord in my area)

Lawn/Exterior Maintenance:  $75/month (my property management company offers this service)

Maintenance:  $100/month (people budget anywhere from 2 - 10% for this... if it's a well updated and maintained property in an area that attract responsible tenants, I budget on the low side)

Property Management:  $100/month (usually 8 - 10%, but you can find PM companies that do it for less... just make sure they're good at what they do!).

CapEx:  $100/month (you should always be setting money aside for work that needs to be done in the future!)

TOTAL MONTHLY EXPENSES:  $1,504 (monthly P&I, plus all the expenses outlined above)

TOTAL MONTHLY CASH FLOW:  $396 ($1,900 rents - $1,504 expenses)

Annual Cash Flow:  $4,751 ($396 x 12)

COC RETURN:  9.1% ($4,751 annual cash flow / $52,475 total cash in)

Net Operating Income:  $13,691 ($1,900 in rents / $759 in expenses other than principal & interest payments... x 12)

CAP RATE: 7.6% ($13,691 NOI / $179,900 purchase price)

So, you can see this isn't exactly a home-run deal as far as CoC return goes, but the cash flow is almost $200/unit, which isn't bad. So if I could get the seller down in price a bit, this could be a solid option, based on MY criteria... and ASSUMING my rent and expense estimates are correct. Other investors may not agree.

Hope that helps a little! Feel free to reach out with questions. And definitely read some of the many BP articles about running your numbers, and start playing with the BP calculators! I'm also happy to share my spreadsheet if it's helpful.

Best,

Megan

@Megan Greathouse This is exactly the kind of explanation that I was hoping for. A big thank you for the time spent on this. Your right, it does feel like a complicated question. I'm interested in how different investors choose different metrics. Like what is it that draws one person to use a 1% rule and another to use a cash flow per door rule? And what makes you say that other investors might not agree with your metrics specifically? 

@Lauren Weiss - You will never get ALL investors to agree to the same metrics, because not all investors have the same goals. And your criteria/metrics should be tied to your personal goals in real estate, as well as the realities of the market in which you'll be buying. Which is why I started that very long post with suggesting you think about your goals and set some criteria that will help you achieve those goals.

I would say that it seems MOST content I've read suggests having at least $100 - $200 in cash flow per door, after paying the mortgage, management and all other expenses. I think it is smart to have a minimum cash flow goal, because anything less than $100 - $200 per door could easily be eaten away by higher-than-expected repairs or utility bills... and then you end up in the negative cash flow zone. Plus, real estate requires enough time and money that you probably shouldn't accept less than that per month for your efforts. I do think most investors have a cash flow requirement of some sort, but it can certainly vary. An investor who's buying properties with cash (and therefore doesn't have a mortgage payment) or is self-managing (and doesn't have the cost of a property manager) can and should expect more cash flow per door than someone like myself, who is leveraging my properties and hiring management to handle the day-to-day operation and tenant interaction.

I would also guess that most investors have a CoC Return criteria, because it's smart business to understand what kind of return you're getting on the hard-earned money you're investing. If you're only getting 4 or 5% CoC Return on the capital you're investing, you'd be better off investing in the stock market, which I believe has historically returned an average 9 - 9.5% over the past several decades. This is why I set my CoC Return at 10%, because I want to know I'm at or above the returns I could get by just throwing my money in an index fund and not having to worry about it. (Of course, there are other benefits to real estate besides just the CoC Return from your cash flows, such as tax benefits and appreciation, but I look at those as the cherry on top.) Again, other investors may set different goals... for instance, someone who has been in the game a while and gotten really good at finding amazing deals and managing their portfolio super efficiently might not accept lower than a 15 to 20% CoC Return.

When it comes to some of the "rules of thumb" like the 1% rule and the 50% expense rule, these are really more quick analysis tricks to help you understand whether a property is worth looking into further... not final criteria for whether or not you should buy. For instance, when I get an MLS listing that looks interesting, I do a quick online check to see what it would rent for and do the math to see if it meets the 1% rule. If it does, I'll take the extra few minutes look up the county records online, run numbers in more detail, and potentially schedule a viewing. If it doesn't meet the 1% rule, then I don't even bother (unless I think I can get it for less than list price). Furthermore, there are certain areas of my market where I know taxes are much higher and therefore even the 1% rule doesn't work... it usually has to be a 1.5% - 2% property to offset the high taxes and still cash flow. So get to know your market and then use these rules of thumb to focus your search, rather than using them as final criteria.

The bottom line is you have to know your goals... do you want a certain cash flow per month to live off or is there something else you're focused on achieving? Once you know your goals, think about the realities of your situation... do you have money to buy properties for all cash, or do you need to finance them? Do you have time to self-manage, or do you need to hire property management? What's possible in your specific market, based on average home prices and typical rents? All of these factors will help you understand what criteria are feasible while reaching your goals. My example... I want to build a buy-and-hold portfolio that generates a steady $10,000 per month in passive income for my family to live off. I don't have millions in cash lying around, so I need to finance my properties, and I work full-time so I want to hire property management. Both these things cut into potential cash flow, so I am happy to accept $100 - $200 per door in cash flow, so long as my CoC return is at least 10% (outperforming what I could do over the long run by passively throwing my money in the stock market). So assuming I average out at $150 monthly cash flow per door, I know I need about 67 units total to meet my passive cash flow goal.

Obviously, you need to put a lot of time into setting your goals, getting to know your market, and then crunching some numbers. If this is still confusing and you need a place to start, consider just borrowing my criteria to start running your numbers... 10% or greater CoC return, and at least $100/month cash flow per door (so $100 for a single family, $200 for a duplex, etc.). It's a place to start, and you can adjust as you learn.

@Megan Greathouse Thank you. This is really clear information. I know what my personal goals are, they are similar to yours, I know the numbers are my weakness and also THE most important part so I'm taking them on head on and this was the first step. I when you put it so simply, I can see how and where I'm getting distracted or overwhelmed by various ways of looking at return. Your time take to respond is much appreciated. Thank you. 

@Lauren Weiss I can't add much to @Megan Greathouse great explanation except to say this book by Frank Gallinelli could help you out tremendously. He gives you the reason and logic behind why the formulas work.

I'm pretty good with numbers and I refer to it at least three times a month. It does a lot to get different investors on the same page the particulars of a specific calculation.

@Lauren Weiss , I'm happy to help! Feel free to reach out if you think I can help answer any other questions.

@Bill F., great recommendation. I haven't read that book, but i've heard great things. I need to order it!

@Megan Greathouse If I'm being honest, and this may be blasphemy on BP, but Frank Gallinelli's book is the best for beginner to intermediate REI. It gives a through process of how to analyze deals and not just example after example of 'invest in cash flowing assets'.

@Bill F. OK ordering now, great recommendation and strangely (though I scour all RE podcasts) I haven't heard of it yet. A hidden gem no doubt. 

@Lauren Weiss he was the second or third Podcast quest I think.

Updated about 2 months ago

Edit: guest

"What every investor needs to know about cash flow"  is an excellent book . Many investors will have different criteria. This book gives you the simple concise ways to calculate various returns. Many times I don't even run numbers before I make a purchase. If I am purchasing a quality property at 20% or higher discount off of fair market value I don't even bother with numbers I just grabbed the deal before somebody else does. Your first rule should be you make your money when you buy. Purchasing at fair market value does not make sense to most investors. I have three properties that cost me money every month but the mortgage terms are typically 3 years. Once paid off they will be nice income streams.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600
Originally posted by @Megan Greathouse :

@Lauren Weiss - You will never get ALL investors to agree to the same metrics, because not all investors have the same goals. And your criteria/metrics should be tied to your personal goals in real estate, as well as the realities of the market in which you'll be buying. Which is why I started that very long post with suggesting you think about your goals and set some criteria that will help you achieve those goals.

I would say that it seems MOST content I've read suggests having at least $100 - $200 in cash flow per door, after paying the mortgage, management and all other expenses. I think it is smart to have a minimum cash flow goal, because anything less than $100 - $200 per door could easily be eaten away by higher-than-expected repairs or utility bills... and then you end up in the negative cash flow zone. Plus, real estate requires enough time and money that you probably shouldn't accept less than that per month for your efforts. I do think most investors have a cash flow requirement of some sort, but it can certainly vary. An investor who's buying properties with cash (and therefore doesn't have a mortgage payment) or is self-managing (and doesn't have the cost of a property manager) can and should expect more cash flow per door than someone like myself, who is leveraging my properties and hiring management to handle the day-to-day operation and tenant interaction.

I would also guess that most investors have a CoC Return criteria, because it's smart business to understand what kind of return you're getting on the hard-earned money you're investing. If you're only getting 4 or 5% CoC Return on the capital you're investing, you'd be better off investing in the stock market, which I believe has historically returned an average 9 - 9.5% over the past several decades. This is why I set my CoC Return at 10%, because I want to know I'm at or above the returns I could get by just throwing my money in an index fund and not having to worry about it. (Of course, there are other benefits to real estate besides just the CoC Return from your cash flows, such as tax benefits and appreciation, but I look at those as the cherry on top.) Again, other investors may set different goals... for instance, someone who has been in the game a while and gotten really good at finding amazing deals and managing their portfolio super efficiently might not accept lower than a 15 to 20% CoC Return.

When it comes to some of the "rules of thumb" like the 1% rule and the 50% expense rule, these are really more quick analysis tricks to help you understand whether a property is worth looking into further... not final criteria for whether or not you should buy. For instance, when I get an MLS listing that looks interesting, I do a quick online check to see what it would rent for and do the math to see if it meets the 1% rule. If it does, I'll take the extra few minutes look up the county records online, run numbers in more detail, and potentially schedule a viewing. If it doesn't meet the 1% rule, then I don't even bother (unless I think I can get it for less than list price). Furthermore, there are certain areas of my market where I know taxes are much higher and therefore even the 1% rule doesn't work... it usually has to be a 1.5% - 2% property to offset the high taxes and still cash flow. So get to know your market and then use these rules of thumb to focus your search, rather than using them as final criteria.

The bottom line is you have to know your goals... do you want a certain cash flow per month to live off or is there something else you're focused on achieving? Once you know your goals, think about the realities of your situation... do you have money to buy properties for all cash, or do you need to finance them? Do you have time to self-manage, or do you need to hire property management? What's possible in your specific market, based on average home prices and typical rents? All of these factors will help you understand what criteria are feasible while reaching your goals. My example... I want to build a buy-and-hold portfolio that generates a steady $10,000 per month in passive income for my family to live off. I don't have millions in cash lying around, so I need to finance my properties, and I work full-time so I want to hire property management. Both these things cut into potential cash flow, so I am happy to accept $100 - $200 per door in cash flow, so long as my CoC return is at least 10% (outperforming what I could do over the long run by passively throwing my money in the stock market). So assuming I average out at $150 monthly cash flow per door, I know I need about 67 units total to meet my passive cash flow goal.

Obviously, you need to put a lot of time into setting your goals, getting to know your market, and then crunching some numbers. If this is still confusing and you need a place to start, consider just borrowing my criteria to start running your numbers... 10% or greater CoC return, and at least $100/month cash flow per door (so $100 for a single family, $200 for a duplex, etc.). It's a place to start, and you can adjust as you learn.

@megan greathouse this was a great, easy to understand breakdown. Thank you for providing such a well thought out and worded explanation!

@Bill F. I'm on it. 

@John Thedford Thats a great point that I think gets easily lost for newbies. So long as one is making money and trying not to purchase at market value there is value as an investor. I like it, very simple and makes it easier not to get caught up in a million and one different ways to run numbers. 

Originally posted by @Megan Greathouse :

@Lauren Weiss - My example... I want to build a buy-and-hold portfolio that generates a steady $10,000 per month in passive income for my family to live off. I don't have millions in cash lying around, so I need to finance my properties, and I work full-time so I want to hire property management. Both these things cut into potential cash flow, so I am happy to accept $100 - $200 per door in cash flow, so long as my CoC return is at least 10% (outperforming what I could do over the long run by passively throwing my money in the stock market). So assuming I average out at $150 monthly cash flow per door, I know I need about 67 units total to meet my passive cash flow goal.

This is great insight and advice. Thanks Megan. I have a few questions: 

1) how many properties to have you today in pursuit of your goal of 70 units 

2) how long did it take you to get there 

3) how much of you own cash did you have to invest?

I would like to reach 6k per month in passive income, which based on your math is about 40 units. I am trying to calculate how much of my own cash I'll need to get there. A lot depends on the appreciation of the homes of your first few investments, as if those go well you can leverage the equity to buy more without needing your own cash. But I am looking for examples for people who've done it before. 

@Adam Beachnau , I'm still pretty new to investing as well. I got started by renting out my first home when I bought a new one back in 2015. After a couple years of testing the life of a landlord, I decided to officially go for it around this time last year! So I bought a four-family property last June, and then sold my first single family (which didn't actually cash flow very much) and put the proceeds into a much better cash flowing single family in November.

So, I purchased 5 units in about six months. My goal is to at least double my units by the end of this year, and achieve full financial freedom for my family by 2026... though I'm hopeful that as I keep learning and growing, it will snowball even faster than that. My hope is to buy mostly small multi-families, so if I focus on four-families I'd need about 16 more properties total. I have some of my goals listed on my profile, if you'd like to see them.

I'm still working on finding really great deals... and ideally I'd like to use direct mail marketing to find amazing deals that I can BRRR (Buy, Rehab, Rent, Refinance) and have little to no of my own cash left in. But for my first two properties, I bought them off the MLS and put 25% down on the four-family and paid for some upfront rehab and 20% down on my single-family rental... for a grand total of just over $100K! Luckily, the single family property I'd owned since 2012 and just sold last year provided about $60K of that (which was a great example of the power of real estate considering I'd only put $12K down on it five years earlier).

I plan to use the BRRR method going forward to make my money go further. If you haven't started reading about it yet, I definitely suggest you do. It's not necessarily easy to pull off, but it seems to me that it's worth studying and working toward.

Hope that helps! Best of luck to you.

@Megan Greathouse thanks for the reply. I love the idea of the BRRR strategy...especially as a guy who is day job is in the finance industry! Awesome way to put money in and then get it back out while getting the passive income.

I've been doing some reading on this strategy but wondering if you have any recommendations of good reading to learn more. One thing I did see on a bigger pockets post was that to calculate maximum purchase price you want to use something like 70% as the margin (ARV *. 7 - Repair = maximum purchase price). I did some modelling to try to understand what margin you would have to use to breakeven (i.e. the equity you take out after refinance is equal to the down payment + repair costs + closing and financing costs). If you assume 25% original down payment and 10k of closing and refinancing, most scenarios actually put the required margin closer to 80%. As closing and financing move higher the rate will go towards 70% so important to get that estimate right. But interesting to see the different scenarios. I can share these and the excel I built if you are interested.

I know you said you are still early in achieving your goals. But wondering if you have fully completed a BRRR yet? Or have you identified what type of properties are good for this strategy? You need multiple things to go right since you need to find a good deal that has flip potential AND rent potential. The good thing about the strategy though is that you have multiple exit points. If you rehab and you don't find good rent opportunity you can always sell and take the equity and move on.

Very interesting discussion! I've learned a lot from this thread already. 

Also I started reading the Frank Gallinelli book. So far really good. They are likely concepts even beginning investors already know, but he puts them in a very concise, clear and structured way which can help you structure how to think about you build your own investing strategy.

@Adam Beachnau ... yes, I'd be very interested in seeing the excel spreadsheet you put together! I love that type of analysis.

I used traditional financing on my first two properties, so no BRRR for me yet. I'm looking for a good candidate now! However, I am beginning to realize that my four-family might actually be a good candidate for the BRRR method based on the growth happening in that particular area right now, so I'm looking into what work I'd want to do and how those numbers might work if I decide to renovate the units more quickly than I'd originally planned and then refinance by the end of the year. We'll see!

Here is a link to the quick model I made: https://1drv.ms/x/s!Ai-DwGffYZzioqo3mc0nfpQdDTTeIA

You can change the assumptions on down payment and financing costs. The top table shows the margin requirement needed in order to break even on BRRR strategy. When I say breakeven I mean the after repair value (in this case the appraised value) - purchase price is equal to down payment + repair costs + financing costs.

The bottom table shows the purchase price. So you can see for example for an after repair value of $300k with $30k of repairs, 25% down payment and $10k financing costs, you would need to buy at $208k to pull all of your invested money out of the property.

Hope this helps. Let me know if any holes in the logic as well!

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