Truly understanding the numbers on a deal

[Brent Whitmore]

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.

[Amanda G.]

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!