Understanding the numbers

29 Replies

So, I am trying to create a deal in my head to try to understand the numbers and what deals look like in real estate. These are just numbers made up for the sake of understanding and aiding my visual learning needs. Just looking for some professionals to let me know if my numbers simply make sense. If not, please enlighten me. Also, what does the phrase "all-in" mean when discussing real estate financials?

$120,000 ARV

$110,000 ask price

$82,500 Purchase Price @ 25% discount market value

$20,625 down payment 25%

$61,875, finance amount

$4,125 closing costs

$5,000 rehab costs

$87,500 purchase price + rehab costs

$29,750 rehab +down payment + closing costs

$90,000 refinance at 75% LTV

$4,125 closing costs

$24,000 cashout

$5,750 money left in deal (29,750-24,000)

AJ,

Your numbers seem good to me! One thing to remember to include is holding costs - interest payments, utilities, pro-rated taxes & insurance, etc.

Holding costs for smaller properties usually aren't a big deal but on larger properties (or large rehabs) they are extremely important to consider. 

Hope that helps!

Why are you putting 25% down, and if you plan on keeping this as a rental, what are the numbers for that as it projects your cash flow?  Those are the most important ones since those are the ones you will end up with for the future.

@Cameron Tope @Joe Villeneuve Thanks guys! Joe, I was just putting together numbers in my mind to imagine real estate deals in regards to financing and what a deal may look like. I just assumed for the purposes of the example that everything in regards to "hold" portion is favorable. In reality, I would also factor in that information. I understand that portion of it a little better. Just needed more understanding of the "buy". 

What does "all-in" mean in relation to real estate investing purchasing and rehabbing?

Originally posted by @AJ Felix :

@Cameron Tope @Joe Villeneuve Thanks guys! Joe, I was just putting together numbers in my mind to imagine real estate deals in regards to financing and what a deal may look like. I just assumed for the purposes of the example that everything in regards to "hold" portion is favorable. In reality, I would also factor in that information. I understand that portion of it a little better. Just needed more understanding of the "buy". 

What does "all-in" mean in relation to real estate investing purchasing and rehabbing?

 So why are you putting 25% down instead of 20%?

Originally posted by @AJ Felix :

@Cameron Tope @Joe Villeneuve Thanks guys! Joe, I was just putting together numbers in my mind to imagine real estate deals in regards to financing and what a deal may look like. I just assumed for the purposes of the example that everything in regards to "hold" portion is favorable. In reality, I would also factor in that information. I understand that portion of it a little better. Just needed more understanding of the "buy". 

What does "all-in" mean in relation to real estate investing purchasing and rehabbing?

 Also, you can't analyze any portion of a hold property without the hold numbers.  That's what it's all about.  The numbers for the buy/rehab work only if they generate a hold property with high cash flow.  There's no way to judge if your numbers look good or not unless you can see the end results of those numbers.  It doesn't matter what your "entrance" is if it brings you an ugly "exit".  Without knowing the exit, you can't evaluate the entrance.

@Joe Villeneuve I understand what you're saying. I just used 25% because I hear some lenders may require that much for an investment property vs 20% so I just go with the higher amount. As for the hold side Of things, the cash flow and operating expenses are assumed to be All favorable. Favorable from what I learned for a SFR is a cash flow of $200 and above. So, for the sake of this example let's just say that I am cash flowing $300 after I factor in all expenses.

Originally posted by @AJ Felix :

@Joe Villeneuve I understand what you're saying. I just used 25% because I hear some lenders may require that much for an investment property vs 20% so I just go with the higher amount. As for the hold side Of things, the cash flow and operating expenses are assumed to be All favorable. Favorable from what I learned for a SFR is a cash flow of $200 and above. So, for the sake of this example let's just say that I am cash flowing $300 after I factor in all expenses.

Sorry, assumptions are not acceptable in REI. You're missing the point of what I'm saying, or at least you're missing the importance of it. It isn't just the end CF that is important in the analysis. It's also all the individual numbers that make up that cash flow...of which some come from the numbers you're working with.

REI is nothing but a math problem with $$$ in front. The right side of the equal sign in this case is the ultimate CF. The left side is made up of two sets of expressions...one for the entrance and one for the exit. Each expression is made up of signs, constants and variables. The best REI live on the left side of the equal sign, where they can control those expressions. The lazy ones, or the shortcut takers, want to live on the right side. They can be successful, but they are not in control.

What you want to know is if the entrance expression works based on the result on the right side of the equal sign, without having any input from the exit expression.  It can't be done.

My suggestion to you would be to find an actual property somewhere and use all the actual numbers...entrance and exit.  You overall desire is an excellent idea,...just incomplete in the needed data. 

$1,600 projected rent

$120 property taxes

$85 hazard insurance

$50 flood insurance

$45 termite/ pest service

$0 utilities (water, sewer, gas, electricity, garbage,) tenant pays

$0 landscaping (tenant upkeep)

$15 safety reserve

$96 vacancy 8%

$ 120 repairs 10%

$120 capital expenditure 10 %

$120 property management 10%

$829 net operating income

$540 principal and interest 

$289 cash flow

@Joe Villeneuve How about this Joe? This is the other side of the equation for the sake of the example. So, $289 monthly cashflow, Cash on Cash ROI 60.3%, Cap rate 8.3 % ( Not a multi family but just wanted to practice calculating it)

Here is what I have:

1 - You're at a loss once you refi = $5,750.  What this really means is you only paid $5,750 for the property...that's like only putting down a 4.8% DP.

2 - Your CF after REFI is $600/m or $7200/yr (throw out items that are arbitrary and don't do what they are intended to do anyway)

3 - This means it will only take you 10 months to break even, and start making a profit...if all goes well.

Here is what I would do (if this was a real property):

1 - NOT use it as a hold property. Use of your equity would be more valuable at this point.

2 - NOT pay 25% DP.

3 - You would have about $53k in equity (including the equity you paid for in DP)

4 - Flip the property at a 5% discount = $114k

5 - Minus CC you should end up walking away with at least $45k (including getting back the DP you put in)

6 - Take the $45k and split it into 2 deals.

     A - Deal 1 = Another deal like this, except this time hold it for 5 years (or less) for CF

     B - Deal 2 = Another flip just like this, and repeat what you did with the original deal

7 - Repeat Step #6 over and over again, until you...

@Joe Villeneuve  thanks for the insight! will you explain more why it will be at a loss once you refinance? 

what are the arbitrary costs? 

How did you determine that the holding is not the best and the that the equity will be more valuable?

Originally posted by @AJ Felix :

@Joe Villeneuve thanks for the insight! will you explain more why it will be at a loss once you refinance? 

what are the arbitrary costs? 

How did you determine that the holding is not the best and the that the equity will be more valuable?

 You put more money in than you are getting out, which is a loss.  

Arbitrary costs are all the ones you mentioned that are not part of the monthly costs:

1 - $120/m for CAPEX? What is that going to cover? There are better ways of doing this...at far less costs. You can get a free new roof when you buy the property if you do it right.

2 - $96/m for vacancy.  Do you know why you are taking that specific amount out?

3 - $120/m for repairs...of what?

4 - $15/m for the infamous "fudge factor" expense.  Why?  What is $15/month, or $180/y going to accomplish?

...and 10% of $1600 is $160...not $120...for PM.

Flipping is better than holding because of the actual numbers with $$$ in front.

1 - Holding gets you $600/m or $7200/y.  This is actually great, however...

2 - Flipping gets you $53k in hand..right now.

3 - Looking at #1 and #2 together, it will take you over 7 years to accumulate $53k...if you have no problems holding over those 7+ years.

4 - Doing as I suggested, gets you this very same deal...plus another identical one.  In other words, you can just take the cash flow now...or...you can double what you have now...by using your equity instead of squirreling it away.

Equity is dead money, and 5 times more valuable outside of the property than inside it doing nothing.

Oh my fault lol, on the math 10% being $120. Anyway, great advice and makes sense! I’m sure I’ll have other questions to post. Appreciate it! 

@AJ Felix i agree with @Joe Villeneuve as far as having an actual property to analyze. You can analyze 5 deals using the BiggerPockets calculators before having to upgrade to a membership. 

It isn't necessarily a bad thing to have a down payment of 25% instead of 20% because that's just more equity you have in the property from day 1. You can use that equity to your advantage in future deals. Is that true for any REI strategy @Joe Villeneuve or just certain ones like buy-and-hold, for instance?

@AJ Felix best advice is to keep educating yourself, practice analyzing deals. 

Originally posted by @Nina Granberry :

@AJ Felix i agree with @Joe Villeneuve as far as having an actual property to analyze. You can analyze 5 deals using the BiggerPockets calculators before having to upgrade to a membership. 

It isn't necessarily a bad thing to have a down payment of 25% instead of 20% because that's just more equity you have in the property from day 1. You can use that equity to your advantage in future deals. Is that true for any REI strategy @Joe Villeneuve or just certain ones like buy-and-hold, for instance?

@AJ Felix best advice is to keep educating yourself, practice analyzing deals. 

25% dp is more cost to you...it doesn't gain you anything.   Equity you pay for is a cost.  It's just your cash turned into dead money.

Gifted equity, through appreciation or the tenant paying down your mortgage from the rent money, is completely different...it's free.

 

Originally posted by @Nina Granberry :

@Joe Villeneuve Ok. So, if you put down a large dp and that money is locked into your property, should you get a HELOC so that it is more useful?

No, just put in as little as possible in the first place.  Why would you try to put more than you need to?

 

@Joe Villeneuve quick question. You say analyze properties for more practice. Where and how do I get properties to analyze and practice without wasting anyone’s (real estate team) time if I am not currently ready to buy? 

Howdy guys!  How about I jump in with my two cents.  Both Joe and AJ are making great points.  I see AJ point of view as the theory side and Joe is the practical side.  Understanding the theory is a very good way to understand how things work and your expenses outlined will keep you on the conservative side.  Joe's point is that in practical some of those expenses are not necessary and eventually cause you to not pursue a deal.  

I think it is also important to understand everyones experience level and CONFIDENCE level.  AJ you're at a very basic level of understanding but doing very well at your stage.  You're ready for a backyard race with your friend, thinking about getting to the finish line first. Joe is at the Olympics getting ready to race thinking about weather, track surface, competition, best shoe equipment and any other advantage he can think of to win the race.  If he was to lay all that out there on you; you might feel overwhelmed and left at a loss of confidence.  

Joe is throwing together a couple significant strategies at you, at a time you're trying to understand one. He has you thinking about flipping and then turning in the profits to flip another and hold another. So a combination of buy and hold, and flipping. It might even be necessary if you have a short time schedule to get your REI program going or you have very limited funds. But it is more complex.

To be successful in real estate is to have some basic understanding of what you want to accomplish, an understanding of how to get there and then a cultivation of CONFIDENCE to get there.  We all have heard we have to walk before we run and you have to learn to crawl before you can walk.  Don't skip those steps.  Joe has you sprinting!  

I understand what he is saying only because I have a lot of experience with REI. I own 19 units (duplexes/one 4plex) and I manage another 6 units for my kids. My confidence level was good when I started but my confidence level is EXTREMELY HIGH now with the experience I have gained through the years. Even with all this experience, I still lean to the conservative side when mentoring to newbies as I certainly want them to be successful. With that in mind let me give you some of my thoughts starting out.

1. Understand your WHY! If you know your why then you can set a realistic goal and be motivated each day to get there. Let me explain. If you read my profile you will easily understand what I am saying. My why when I first started in REI was to save dorm fees sending my kids to college. After two years and unexpected success, my WHY changed. It changed because I started to realize what REI could actually do for me. My why now is to invest in REI for positive cash flow to augment my RETIREMENT to enable me to live at a ROBUST standard of living in RETIREMENT. Just me, but I never understood the flipping strategy if the WHY was to just make more money. Money is a means to an end but not the end itself. One of my early deals, I found a duplex for 70k seven years ago in Austin. I could have sold it within five days for 120k doing absolutely nothing to it. What an amazing story that would be my Christmas party. If my goal was to just make money for money sake, why not just flip it. Well if I could find that deal every day with little to no risk that this was then yes certainly do it. But instead, I put another 10k in rehab and seven years later rent is 1100 per side and the property is worth 350k. This property certainly supports my WHY!

2. Keep your numbers conservative, especially when just starting out. When I hear buy no money down, leverage as much as you can; it makes me cringe! That is certainly a recipe for disaster IMHO. When a mortgage broker approved me for my first home, he said I qualify to buy XXX amount of home. Scared the sh** out of me. Most people feel a lot of pride and buy up to their max and then they live paycheck to paycheck the rest of their life. Before the housing crisis of 2008 you could buy an investment property with as little as 3-5% down. I didn't, I have always put a minimum of 20% down. Why? Because my goal was POSITIVE CASH FLOW. PMI just took way from that and provided no advantage paying it.

3. Starting out, IF YOUR WHY IS SIMILAR TO MINE OR CASH FLOW IS THE PRIMARY OBJECTIVE, then consider a duplex. Also be your own property manager, your numbers will look better. After you get more experience and CONFIDENCE then decide if property managing is the right thing for you.

4. Keep your REI account separate from your personal account and never rob it to enhance your personal life until your WHY is achieved.

I think this is enough for now.  AJ you are right MOST lenders are now requiring 25% down.  Think long term.  Remember two things you learned as a kid and apply them to your life today.  They are:

1.  Who wins the race the tortoise or the hare?  Slow and STEADY wins the race.

2. How do you win in Monopoly?  Gather property, BUILD MULTI-FAMILY and Charge RENT!  CASH FLOW IS KING, never forget!!!

@Joe Scaparra this post has taken off and has provided me a lot of take aways. Also, my WHY is freedom. I lived up to what people have always told me growing up which was about getting good grades and job etc. I earned a masters degree and make good w-2 income but I realized at 30 years old that I felt trapped. I do not have anything to transfer to my children, I am stuck in the life as an EMPLOYEE and I hate it the most. My goal in life at 33 years of age is to focus on achieving the freedom to wake up and not be obligated to someone else's business but rather my own. I want to work hard to build my own success to allow myself and family choices. I will do whatever I need to get there. My freedom equates to income replacement through cash flow using REI as my tool to get there. I have been working to save money(100k) to get started. I am just focused and work everyday to accomplish small actions that will allow me to obtain the goal such as reading and doing REI book club discussions with my hopeful future business partner and friend , reducing personal operating expenses, Podcasting, posting in BP forums. My heart yearns to achieve my own successful business, wealth, and freedom. My next step when I am ready to buy is to build my team then work toward securing my first deal and repeat.

I want to ask you the some questions. Where and how do I get properties to analyze and practice without wasting anyone’s (real estate team) time if I am not currently ready to buy?

What does "all in mean" in REI?


and any other advice for me after learning about my WHY? 

Originally posted by @AJ Felix :

@Joe Villeneuve quick question. You say analyze properties for more practice. Where and how do I get properties to analyze and practice without wasting anyone’s (real estate team) time if I am not currently ready to buy? 

 Zillow listings

@AJ Felix , use zillow.com or realtor.com to find properties for sale and run your numbers from them.  All in usually means all the money you would spend to get the deal done including the rehab cost to the point you either flip it or rent it. 

AJ, define what freedom looks like to you.  I would describe it as being able to do what you want, when you want and where you want, without regards to being compensated or not.  That is a description but does not define it.  For you to define it would  be something like:  My financial freedom is achieved when I have $12,000 a month coming in from a passive income source that is not likely to run dry.  Passive Income can be achieved through real estate.  $12,000 is just an example, it will vary depending on the individual.  

I invest in duplexes and my analysis tells me that for every duplex I own outright will produce between 15-20k net income each year. So if I need $150k a year to be financially free then I need to acquire 8 to 9 duplexes. I don't need to make inflation adjustments because my duplex rent should adjust for inflation. You are 33 now. Start by getting one duplex this year, two duplexes next year and each year after. At age 38 you should be making payments on 9 properties. Then start taking the profits on all your properties and start paying off one of the duplexes. Using the cash flow to pay down the debt, you should be debt free by 50. Now you will be financially free. Re-evaluate your situation each year and you might be able to adjust your timeline to suit your desires. Remember this is a marathon not a sprint. The tortoise vs the hare, remember who wins. Slow and steady is what you should be after. Cheers!

@Joe Scaparra @Joe Villeneuve got it, and my freedom would look like $8,500 per month after taxes. 


what are the best books to learn about investing in duplexes or small multi family? 

Do you analyze duplexes from an income approach based on the money that the property generates or like single family homes based on comps of recently sold properties etc?


I want to begin with a duplex but was cautious and thought getting a SF home would be safer to start. The advantages/ disadvantages are more favorable from my viewpoint especially if I am to partner in deals. Not sure, any advice. Partnering would allow me to have a source of income to buy deals at a faster rate. 

I set an arbitrary number of 100k to get started but is 50k enough?