How do I look at deals

Question

So I have become a YouTube king watched a lot of videos. Thought I figured out a good way to analyze deals. But when it came to looking at a deal and talking numbers with a real estate agent or lender I was way off. And so I'm just wondering why when I thought I could get a cash flow off my numbers I was breaking even or going negative. Because the payments were high

Alvin Sylvain · Answer

I would recommend getting accustomed to a good Deal Calculator. BP has one you can use, which I do not know whether it has restrictions. I've gotten to like the one at DealCheck.io, which (of course) also has an App. I think you get to save like 7 or 10 deals for free, but if you're only doing this part-time, you can always erase older deals.

Using a deal calculator is an education in itself. Before using DealCheck, I'd never thought to include Capital Expense in my calculations. You don't have to, but it's prudent to include a percentage of rental income as an "expense" that you save up for when, for example, the roof needs replacing. It's also prudent to include vacancy rate as an "expense", because if a tenant leaves, it'll likely be at least a month before you can rent that unit again.

There's also a section for flippers, altho I haven't used it since I'm not yet interested in that strategy. I'm sure it's also educational!

One point I want to make: you say your numbers don't agree with the agent or lender. Which numbers?

If you're coming up with different payments based on loan amount, interest rate, and term, somebody is screwed up, maybe you, maybe them (not likely them). Your numbers shouldn't differ from anybody else's numbers by more than a few pennies. (Don't forget, interest rates are annual, payments are monthly, so divide the rate by 12 and multiply the number of years by 12.)

If you're talking about Capitalization Rate, I have yet to calculate a CapRate that matches anybody else's. This is because different people take different expenses into account. I once matched a seller's CapRate (actually just came close) only after NOT including the ANY CapEx, Vacancy, Maintenance, Repairs or even Property Taxes. OK, I can see skipping CapEx and Vacancy -- but property taxes? What, property taxes suddenly aren't an expense?

If you're talking Cash Flow, same thing. Everybody has to agree on what's an "expense" vs. what's a "pre-expense" (CapEx, for example, is money you pay now against an uncertain future, and not everybody does that). How much maintenance exactly are we talking about? Maybe they're not including the gardener coz they expect you'll mow the lawn yourself (fat chance!)

Then there's what's called the "ProForma" numbers, or what they ought to be on paper, vs. the "Actual" numbers. It may be a great deal "ProForma", but then you check the "Actuals" to find out that 1 tenant hasn't paid rent in 4 months, and another tenant is constantly calling for one or another repair, and those expenses are adding up fast.

Also consider they might use last year's interest rates. Well, it won't do you any good if the deal only looks good at 3.5% interest, when the best your credit qualifies you for is 5.5%.

You can see how a seller might be motivated to "fudge the numbers" just a little bit to help make a sale. ALWAYS do your own calculations YOUR way. If you can't come up with anything similar to the agent or the seller, ask questions. If their answers don't make sense, maybe you need to look elsewhere.

Anton Ivanov · Answer

@Alvin Sylvain

Thanks for giving DealCheck a shoutout and I'm very happy to hear it's helped you on your journey!