Truly understanding the numbers on a deal

4 Replies

Hello,

My name is Brent.  My wife and I are still VERY new to investing in real estate.  We do have one single family property that we converted to a duplex to maximize returns.  However, for us to move forward as better investors, I think we need to better understand the numbers.  Our big question is this, why do we not include renos and down payment / closing costs in our bottom line of cash flow. For example, here are some numbers.

list price - $300K

dwn pmt - $60K

reno's - $60K

mortgage - $240K at 3.5% 30yrs amm.

rent $2650

monthly cash flow on mortgage only (after expenses and taxes and such) - $578

However, this cash flow doesn't include the down payment, reno's or closing costs.

That total for that is $60K + $60K plus $6K = $136K (dwn pmt, reno, closing)

Some investors don't have that money lying around so they'd need to borrow from somewhere, correct?

Say from equity at 3.5% $136K is roughly a $500/mo. payment.

Technically if the investor uses the initial mortgage cash flow of $578 to pay for the equity payment of $500, wouldn't $78 be the overall cash flow?

Would this investment be a good deal?  Please help me wrap my head around the finances.

Thanks in advance.

Welcome, Brent. thanks for putting in enough detail that I think I can catch your question.

People use different calcuations to determine the value of an investment to them. I use Cash on Cash as my main calculation, which absolutely includes the mortgage payment, down payment, renovations, closing costs, and everything else. 

Roughly speaking it looks like this:

Estimated closing cost + down payment + renovation = my cash in

Cash flow= rent - all monthly expenses, including reserve for capital expenses, operating expenses, PITI, vacancy, any utilities I need to cover, etc.

cash flow*12 (for a year)/Cash in = Cash on cash return

I like using this because it is real dollars, not messing around with appreciation/depreciation, etc. Hope that helps!

Thank you for the detailed explanation. So for cash on cash return, for the example numbers I gave - would only be 8.7% at best with a monthly cashflow of $160 at best after conversion to a duplex. In one of Brandon Turner's youtube videos I watched very recently, he mentioned he wants to make at least $100 or more per unit and at least 12% ROI. With the above example, it would only be $80 per unit (at best) and only 8.7% ROI. That's without factoring in vacancy and Cap X which would bring both of those numbers down even further. So even though it's not a terrible deal necessarily, it's probably a deal I should walk away from because margins are simply too slim and leaves no room for any issues like a new furnace, AC breakdowns etc..

Thanks Amanda!

Hi Brent,
I'd suggest, since you put the effort into the analysis, that you go ahead and make an offer at the price that you are willing to purchase at. (and Brandon's numbers are nice, but you can decide if they are important to you)  This is a numbers game, the more offers you put in, the more likely you will find someone on the other side who wants to sell.

In general, people buy multi for cash flow and SFR for equity, but not always. go with what meets your goals.