Quick calculations for deal analysis?

5 Replies

I am starting to put together my processes for deal analysis.

I am using the REI spreadsheet that @Joshua Dorkin  provided in the following post, but I think that I need a more to the point calculation to rule out properties that are not anywhere in ballpark.

http://www.biggerpockets.com/forums/88/topics/2551...

The following would be helpful:

  • Suggestions on steps to take/information to collect, numbers or otherwise
  • Quick calculations. Example, using the 2 or 1% rule and immediately discarding properties that are under 1%. Whatever tools you use in this same manner.

Thanks, Chris

@Joshua Dorkin  

Thanks. I plan on using them once I have a select number of properties to do a more involved analysis of.

What I am looking for is some input on quick/dirty deal analysis processes REIs use before moving onto the next step.

Based on the following two facts:

1.  I like to see at least 12% cash-on-cash return on an unleveraged purchase

2.  I'm comfortable with the 50% Rule as a first-pass analysis tool

here is the formula I use to quickly evaluate a property:

Gross Monthly Rent * 50 = Max Purchase Price + Rehab

This is equivalent to getting 2% of the purchase price in gross rent  (2% Rule).

If you're happy with 1% of gross monthly rent (6% cash-on-cash unleveraged), you can use:

Gross Monthly Rent * 100 = Max Purchase Price + Rehab

@J Scott 

Thanks. What am I looking for exactly? I am going to watch BT's BP video in the AM, but if it does not include the mortgage payments, that is another piece of the equation that I have to put together.

I may not be thinking about it correctly though. Please elaborate if you can.

PS. I purchased your book on Rehabbing last week. Really looking forward to reading it.

Originally posted by @Chris Stromdahl:

Thanks. What am I looking for exactly? I am going to watch BT's BP video in the AM, but if it does not include the mortgage payments, that is another piece of the equation that I have to put together.

I may not be thinking about it correctly though. Please elaborate if you can.

My equations above do not assume any financing/debt service.  If you want to factor in debt service, it's best to do something like this:

((Gross Monthly Rent * 6) - (Annual Debt Service)) / Desired COC = Max Cash

For example, if you're getting $1000/month in rent, paying $300/month in rent and want 15% leveraged cash-on-cash return, your max cash out of pocket would be:

(($1000 * 6) - ($3600)) / .15 = $16,000

This is based on the 50% Rule as well.  Here's something to watch to get an idea of how I typically do the math in my head (the same as the examples I provide towards the end):

http://www.biggerpockets.com/forums/311/topics/722...