Should Newbies Have Access to Calculators?

Buying & Selling Real Estate
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Should Newbies Have Access to Calculators?

Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

OK, y'all.  Are you new?  If so - pay attention...

I got a PM today from a very nice guy.  Very well-spoken, seemingly intelligent, and well educated.

He introduced himself, and congratulated me with a job well-done on Cardone's show. And then he proceeded to tell me about a multiplex he was considering.  He said that the price was too high, and he knew it.  But, he was going to be able to achieve very favorable owner-financing terms, with low down-payment, 30-year am, and low interest rate.

He then invited me to view a link, which turned out to be a PDF of Brandon Turner's BP Calculator, and asked for my opinion...

You should know - I answer each and every message, email, and telephone call; specifically when approached with due consideration, as in this case.  I proceeded to open the PDF, and was impressed!

I've never actually used the calculator before.  I've heard Brandon sell it as "sexy" on webinars before, but I'm old and got no energy for "sexy"...  So - I was impressed with all of the color and nice graphics...

And then I looked at the top line numbers:

Income: $7,975
Expenses: $7,560

Cash Flow: $414

This is a 10+ unit, by the way.  The proposed cost was north of $650k.  Required down-payment was around $30,000...

WOW - anyone else see a problem with this?  

I've often said that it's about as difficult to buy RE as it is to fall out of a tree.  Well - this dude just fell out of a flippin tree...haha  At least he was smart enough to allow a tree branch (me) smack him over the top of his head.  Perhaps now he'll begin to look at things a bit differently..

But, there is another interesting piece to be noted here.  How can someone look at those numbers inside a colorful sexy PDF and see absolutely nothing?  And - should someone have access to a tool such as this prior to attaining a level of fluency to be able to interpret what he is seeing?

This type of use of calculators demotes them to a stat gimmick.  The tool is no use until and unless the user knows enough to be able to use it.

So - should newbies have access to calculators?  Is it really a benefit.  Or, would it be better, if we really want to teach them how to do this math, to sit them down in front of a spreadsheet and really teach them how this works...perhaps even in a webinar?

Thoughts? 

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Brandon TurnerPro Member
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
11y

The calculators are just a tool. A spreadsheet is not going to be any better at telling someone that $400 a month in cash flow on a 10-plex is a bad idea. The only way they learn that is by learning it, which ... correct me if I'm wrong... is what 99% of BiggerPockets is? 

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  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    11y

    @Ben Leybovich and @Joshua D. 

    As a newbie investor myself, perhaps I'm the rare position of being able to provide value in response to the question that you've posed here.  

    I myself have repeatedly talked about my professional background in data analysis and financial modeling.  My ability to work quickly and accurately in spreadsheets is  perhaps my most valuable professional skillset that you can quantify.

    I build almost everything out in my own spreadsheets when I plan out my finances, website anlaysis, and yes, my real estate expenses and projections.

    That said - as you yourself have noted - I don't know what the hell I'm talking about when it comes to investing... yet.  I haven't had ten years investing and learning in the school of hard knocks. 

    THAT's where the calculators come in.  Yes it's data entry.  BUT - it's pretty darn easy to forget an input, to not even consider closing costs, to not consider electrical, water, or any other number of expenses that come up in the course of an investment for a newbie.  The calculator puts those expenses right in front of your face.  It forces you to make a guess on all those numbers, at at the very least acknowledge their existence as costs that landlords must consider - something that the spreadsheet obviously can't do.  

    For me, if I really want to pull those numbers into Excel and play around with the inputs for hours and run all sorts of fancy monte carlo sims, etc, that's great - I can use the calculator as a guide and do that sort of manipulation myself.  I've probably logged 5,000 -10,000 hours in spreadsheets and can model out 30 years in under an hour or so.  Most people can't do that.  They don't have the time or inclination to develop a skillset that you seem to be taking for granted.

    The calculators for less experienced folks serve both the purpose of forcing them to consider each input AND they perform the mathematical calculations needed to predict the future of the investment.

    Are they the one perfect solution to anyone and everyone?  No.  There isn't one of those perfect solutions anywhere.  But they are a pretty darn good product to help newbies wrap their heads around basics of a first investment and they provide a framework for intelligently analyzing an investment.  Plus - we define each expense and suggest ways to look them up!  

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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    @Joshua D. - a couple of things:

    1. Yesterday I had 12 people to my site from BP, which is considerably lower than most days.  This post, if it was meant to drive traffic, was a complete failure...  I did send 8 people to BP, and while that's not a lot in your universe, it is highly targeted traffic.  I bet at least half of the posts on my site indicate that BP is the most relevant resource on the internet for RE and contain linksI!

    2. Me calling you a potz in a post is the next best thing to me saying "I love you".  If you look in a Yiddish dictionary, the translation you'll find is: Potz - a highly accomplished and relevant individual who happens to be a nice guy, and who happens to be Jewish. Josh - I can't believe you throw that at me as if it was meant as an insult...?!

    3. I am indeed very close with Brandon, which is to say I tell him everything. I know what you're about.  I am not challenging your motives in this post.  But, I am challenging the viability of the calculators as learning tools - I think there should be accompanying "manuals" which dissect the perspective on the numbers. 

    To that end, here's my offer:

    Let me create a pre-recorded webinar series dealing with the calculators - perhaps as much as 4 30-minute webinars.  All of the folks who sign up for Pro membership will get access to these.  2 hours is enough to outline some of the major bullet points and pit-falls, and to give people a better sense of what these calculators are and are not.

    I would be happy to do the work.  Won't cost you or BP a dime.  I may have to ask Brandon for help with the technology, since I am mostly a dumb landlord.  But, I do think this is important and would add value to all newbies who want to use the calculators.

    Thoughts, Josh?  

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  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    11y

    @Ben Leybovich 

    I am not really sure what the point of your post is other than you wanting to teach a course/webinar??

    I think the online calculator is a great tool. IMO, a lot better than a newbie creating his own spreadsheet and missing bunch of things that he should have considered. 

    After an investor does so many deals, he doesn't need any online tools or spreadsheets. Numbers become second nature and you look a deal and can work the numbers in your head and make a decision.

    I work with some experienced investors from BP and a lot of times we discuss a deal on the phone and run the numbers through the numbers over the phone and make the decision whether to move forward or not. No tool or spreadsheet needed, but for a newbie to have the online tool is a great thing to consider all the costs that he might not otherwise consider due to lack of experience.

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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    @Sharad M. - I'd be very happy with you teaching this introductory webinar. I knew the newbies would be in good hands.

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  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    11y

    I think @Joshua D. and @Brandon Turner do a pretty good job of it.

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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    Hah tou-che, @Sharad M. - but someone should...

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  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    11y

    @Ben Leybovich 

    Sorry to disappoint you, but I was serious.

    I started REI about 4 years ago and looking back I can confidently say that nothing has been more influential in the little success that I have had than BP. I knew nothing about REI before I joined BP and mostly everything I have learned has come from BP, so I am extremely thankful to have this great platform. Nothing is being served on a silver platter here, but if you are willing to learn than there is abundance of knowledge and experience to leverage from.

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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    No disagreement about BP being priceless, @Sharad M.   And your success is hardly little. And what makes you the success that you are is precisely the fact that having figured the numbers out, you can now do them in your head while conversing with partners on the phone. 

    Sharad - this is what it takes to succeed in this sport.  This, in and of itself, proves my point. Calculators should not be used as crutches or short-cuts to bypass fundamental understanding. I think the calcs should be accompanied with explanations and directions in order to be of real value as teaching tools.  I don't care who creates those, but someone should.  Brandon is busier then all hell, so I just offered to do it.  But, no matter - someone should create something to go along with those calcs IMO - that's all I'm saying.

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  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    11y

    @Ben Leybovich Can you please provide a specific example of what explanations and directions should go with the calculators?

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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    @Sharad M. - for example:

    1. How to weight the CCR calculation

    2. How to use Cap Rate properly

    3. The relationship between down-payment and resulting CCR

    4. how to underwrite value add

    5. How to underwrite age relative to Cap Rate

    6. How to underwrite location relative to Cap Rate

    7. How to underwrite rent pricing relative to CapEx, Vacancy, and Maintenance

    And potentially also how to blend all of the above into an IRR and NPV, which are not currently part of the calcs, and perhaps shouldn't be at the beginning stages, however basic perspective on those will focus people's perspective onto long-term ownership cost/benefit analysis.

    All of the above are just numbers, but each stands for something more than itself.  This is a question of perspective which comes with experience, and I am thinking that people will better understand where the numbers are coming from if we explain it a bit...

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  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    11y

    @Ben Leybovich 

    I don't invest in multi units, so some of the above items may not apply to what I do. I invest in SFHs and honestly, the main factor I consider is how much money I am going to make on the money I invest. You can call it CCR, Cap Rate, IRR, etc.

    I am sure I oversimplify things, but this is the only way I have learned to invest.

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  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    11y

    @Ben Leybovich

    I just posted a blog today about understanding (as opposed to crunching) the numbers on a multifamily investment.   I'm still relatively new to investing (compared with you and the other BP BMOC's), but did I do okay?

    http://www.biggerpockets.com/blogs/6815/blog_posts...

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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    Nice post, Kevin. You've got the basics exactly right. I would mention 2 things, if I may:

    1. The decision to buy or not to buy is only 10% numbers - the rest is more difficult. Numbers deal with absolutes, however most of the difficulties exist not in the world of absolutes...

    2. CCR is very important in that it tells us how quickly we'll be able to rinse and repeat. However, CCR is highly limited in the fact that it is a static metric - screen-shot in time, if you will. As you know, things don't work like that in the real world. Cash flows, both positive and negative, don't remain static month after month and year after year. And not only that, but the value (buying power) of said cash flow changes over time as well. In other words, 14% CCR next year is not the same thing as 14% this year, etc.

    Thus, to get much more specific, we must underwrite to the IRR, and potentially also discount future cash flow to net present value (NPV) using MIRR. This is the only way to compair apples to apples as it relates to investment returns. Not to mention that IRR underwriting requires that we project an exit, which has tons of value to us...:)

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  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    11y

    @Ben Leybovich- agreed on both points.  That post came out of seeing so many "should I buy this deal?" posts in the forums that just gave the bare minimum of information. There is much more to it when it comes to evaluating a specific property and reevaluating your exit strategies over time, but it seems a lot of people on the forums are trying to jump in and buy something without a basic understanding of those initial analysis numbers. 

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  • Justin VanDervort
    Apalachin, NY · Member since 2014 · 12 posts · 9 votes
    11y
    Looks like this is a pretty warm topic! I think Brandon Turner is dead on. Then again he is the political figure of the site! ;) Tools are to be used wisely and at the risk of the individual. mistakes will be made by some but successes will be made by others. Ben Leybovich, let me ask a question if someone hasn't yet raised the same question. Would this mistake have been caught without the help of the calculator?
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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y
    Originally posted by @Justin VanDervort:
    Looks like this is a pretty warm topic!

    I think Brandon Turner is dead on. Then again he is the political figure of the site! ;)

    Tools are to be used wisely and at the risk of the individual. mistakes will be made by some but successes will be made by others.

    Ben Leybovich, let me ask a question if someone hasn't yet raised the same question. Would this mistake have been caught without the help of the calculator?

     What mistake is that, Justin?

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  • Virginia H.
    Investor · Mobile, AL · Member since 2015 · 66 posts · 21 votes
    10y

    This is an old topic and I do apologize for raising it from the dead.  However, as a newbie that "knows how to do the math," and "knows what the numbers means," I would like to say the following:

    1.  I am very grateful for the calculator.  Though I can do the math I do not trust myself to do the math. 

    2. I do very much like the idea of a dictionary of meanings - or a how to interpret the numbers - but instead of a webinar it would be best served in written form.

    3. I do agree people should know the mechanics behind the input.  Maybe those written instructions can come with the actual mathmatical formulas used in these calculations and an example that will show people what numbers to input and where and how to perform the actual calculation -- like a real life word problem... There are many out there that do have problems interpreting word problems and determining placement of numbers and this could be useful ...

    Some may say "those people" that can't do "basic" math should not be investing. I disagree. I say, "most any monkey can be trained.  I know because I was."

    Thank you.

    P.S. ... I am not volunteering for the job.

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