Quick guide for analyzing a deal: 23-28% expenses
A quick formula/guideline for those of your looking at deals.
Many people who get into investing or look at deals often don’t calculate the “real” cost of expenses.
My guideline is always OVERESTIMATE because things always cost more than you think.
The quick formula I use to evaluate a deal is is 18% to 28% NOE (net operating expenses). This includes all costs except for your mortgage loan (principle/interest).
Keep in mind this is just used to quickly evaluate a deal but you’ll need to go through all of the numbers once you have it under contract or make an offer.
Example:
Duplex for sale at $400,000
Current gross rents $1500/month. (Could potentially be raised to $1600, but start with the lower number to be safe).
$1500 income x 23% = $345 expenses.
- Property management - 9% @ $150
- Capital expenses (improvements and repairs to set aside in a savings account) - 5% @ $75
- Utilities, landlord licenses, city fees, etc. - 4% @ $60
- Vacancy rate - 5% @ $75
- Insurance and taxes - 7% @ $105
Now take your mortgage at 4% interest over 30 years (assuming you’re putting 25% down which would be $100,000) and your principal and interest payment will be $1433 per month.
$1500 gross income - $345 NOE - $1433 mortgage = -$278.
This math doesn’t work so don’t do the deal!… Unless you can figure out how to drop the purchase price, lower the interest rate etc.
Otherwise your cash on cash return would be negative (always a terrible idea):
-$278 x 12 months = -$3,336
-$3,336/$100,000 = -33.4% return.
Case in point don’t just buy something because it’s a “good investment “tip by someone else. If the math doesn’t work nothing else will.
Hope this helps and happy investing!
#4 All Forums Contributor
- Plymouth, MI
Why? Why not just do it with real numbers in the first place instead of wasting time with a step that, because of the number of estimates/fudgefactors you have in your "analysis" (and I use that term loosely...very loosely), will most assuredly lead you either away from a good deal, or towards a poor one. In either case, you won't find out which one it is until you do a real analysis.
So I ask again, why?
Originally posted by @Joe Villeneuve:Why? Why not just do it with real numbers in the first place instead of wasting time with a step that, because of the number of estimates/fudgefactors you have in your "analysis" (and I use that term loosely...very loosely), will most assuredly lead you either away from a good deal, or towards a poor one. In either case, you won't find out which one it is until you do a real analysis.
So I ask again, why?
Good question Joe, this is just a quick way to preview a deal when looking through the MLS, etc.
Of course when you find the select properties that you want to dive into a full analysis needs to be done.
It’s more of a filter of what NOT to buy rather than used to make a decision on what TO buy.
This helped me 1031 3 properties into 3 better ones for improving cash flow and equity in the last 6 months.
I hope that makes sense.
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Tyler Williams:Originally posted by @Joe Villeneuve:Why? Why not just do it with real numbers in the first place instead of wasting time with a step that, because of the number of estimates/fudgefactors you have in your "analysis" (and I use that term loosely...very loosely), will most assuredly lead you either away from a good deal, or towards a poor one. In either case, you won't find out which one it is until you do a real analysis.
So I ask again, why?
Good question Joe, this is just a quick way to preview a deal when looking through the MLS, etc.
Of course when you find the select properties that you want to dive into a full analysis needs to be done.
It’s more of a filter of what NOT to buy rather than used to make a decision on what TO buy.
This helped me 1031 3 properties into 3 better ones for improving cash flow and equity in the last 6 months.
I hope that makes sense.
While you may have found those properties doing it your way, how many better deals did you miss where the numbers were better in real life than your "fudge factors"?
#4 All Forums Contributor
- Plymouth, MI
Your example is a really bad one to prove your point. Sorry. It's a non-starter. You don't have to go any further than subtracting the one known (mortgage = $1433) from the other known (rent = $1500) to tell you that.
Quote from @Joe Villeneuve:
Your example is a really bad one to prove your point. Sorry. It's a non-starter. You don't have to go any further than subtracting the one known (mortgage = $1433) from the other known (rent = $1500) to tell you that.