How to run the numbers on a property?

8 Replies

I plan to do my first deal in the next year or so and I want to start running numbers on properties now to practice and see whats a good deal and whats not a good deal. I plan to do long term rentals with multi-family and single-family properties. My question is how exactly do I do this? Whats the secret formula to see if a property is worth investing in? Any information will help. Thank you!

I like to look at cap rate, and many like cash on cash return cap rate is income minus expenses (excluding financing costs) divided by purchase price.  Cash on cash is your cash flow divided by the amount of cash you put into the property.  What a good percentage is will vary widely from market to market.

I hate the "It Depends" answer, but it this question will certainly be answered this way unless you give parameters for what you are trying to get out of your investment.

Are you looking for high cash flow, appreciation, or a little of both? 

How much do you want to leverage, if at all?

Are your homes going to be newer where your Capital expenditures are lower?

Will you self-manage? If so, will you switch to professional management later?

are you paying utilities?

What are vacancy numbers in your target neighborhood?

These are all questions I would look at beyond the standard price vs rent question.

I would start with the end in mind first and find out what exactly your goal is for a property.

e.g. "I am looking for a 10% return on my money and at least $150 cash flow per door". 

Once you have your desired destination, you can work backward to where you need to be.

Look at the rental calculator here on the site and plug in some numbers to see how they change your outcomes. 

For example

I would use the calculators on this site @Michael Guydish . It's a great baseline to run with. You will have to determine what your criteria are for net cash per door (how much money do you want after expenses). Are you going to manage the property yourself to start out or use a property management company? The calculators will walk you through how to run the numbers. Keep playing with it until you get comfortable. You can also use them to run different scenarios and see what works for you. 

@Michael Guydish In addition to the points that @Dan Barli made, you should concetrate on educating yourself in the niche you're interested in. Also start with one niche at a time! Say you want to learn all about MFH investing, get yourself the books on the topic, listen to the relevant podcasts, network with like-minded investors. This will guide you in the right direction!

Best!

@Michael Guydish - BP has different calculators on the site that you can use. Without a premium account I think you can use them for free on three properties or something like that. I personally bought ‘Property Evaluator Pro‘ iPhone app from www.realestatetools.com when I started a few years ago. I got to know about it through one on the podcasts I listened to a while back. I think the app is fantastic and has helped me a lot! Its the best $40 I have spent other than $9.99 or whatever I spent to buy ‘Rich Dad Poor Dad‘ :)