How to analyze deals for beginners

Question

Hey everyone! Progressing through my early stages in real estate investing...I'm having a lot of difficulties knowing where to get started in analyzing deals and running numbers. I'm checking Zillow, I just don't know whether a deal is worth it or not. Any tips or advice on how to effectively analyze deals? Is there a step by step plan to follow?

Jerry Thompson · Answer

FWIW @Jhonatan Espinosa, the equation Mike included was not quite right, wanted to make sure it was clear in case you were confused.

The "percent rule" takes the purchase price and helps you determine the needed income to cashflow. Somewhere between 1-2% is considered ideal, although it can be higher, and lower than 1% is typically not advised.

$50,000 (purchase price) x .02 (2% rule) = $1000 (income needed to cashflow)

On the flip side, dividing the estimated income by your desired percent rule will give you a rough idea of your max purchase price:

$800 (income) / .02 (2% rule) = $40,000 (max purchase price)

Once you get an idea of the rents or income plays in your market, your offers become sort of automatic. Per that last example, every area with a rent estimate of $800 will result in a max purchase price of $40,000 if you want a 2% deal.

I'm in Dallas trying to find a 1.5% deal. After doing some analysis to get my ideal cashflow number, that's about what I found it took in the areas I've been looking to hit my cashflow goal. Again, every market is a bit different.

Mike Dorneman · Answer

@Jhonatan Espinosa From a very high level, you can look for the 2% guide.

i.e. property costs 50K. you can rent this for 800/month.

50,000 / .02 =  $1,000.

So, if you are set on 2%, this would not be a good deal.  Please keep in mind. this is a very high level quick and dirty evaluation. I'd recommend the BP book, " The Book On Rental Property Investing".  In this book you'll find plenty of useful info, along with calculations and formulas for truly deciding if a deal is "good" or "not".

Nick DelConte · Answer

@Jhonatan Espinosa If you're looking to find out what the demand is for a certain unit type in a specific area and at what price point, one strategy is to set up an ad for a "hypothetical" unit identical to the one you are interested in buying.

Set up the ad with the nearest intersection for the location of the property (not the actual property address) and attach some pictures of interior finishes similar to the property you are interested in. If you are going to make upgrades, attach pictures similar to what you want your finished product to look like.

This is super helpful in identifying 2 things, PRICE (rent) & DEMAND! Once you run the numbers on the specific property to find out what rental rate will allow you to cashflow at least $100 (preferred) / month, list your "hypothetical" ad for that price.

If you have a tone of responses, DIG DEEPER! you found a great opportunity! You may be able to demand a higher price and increase your cashflow.

If you have limited responses, first, hunt down every similar unit for rent within 2 city blocks (very local!) See if your competitors are priced much lower and what level of quality they are offering for that price. If competitors units are very similar to the unit your interested in, consider if a different financing strategy can help you achieve cashflow? It may very well be the simple fact that the property is overpriced for an investment, negotiate a lower purchase price or consider looking for opportunities elsewhere.

If your competitors are priced at the same price that will allow you to cashflow, it would most likely point to a low demand for rentals in that specific area. Google "vacancy rate" for that city/neighborhood to find out if the area vacancy rate is trending up or down. If vacancy rates are trending up, rental demand is down and rates will follow, I would move on. (find out where everyone went...)

A helpful tool to see the amount of renter's in a given area is actually your local MLS! If you look up properties for sale in the same neighborhood, and click on the "statistics" tab, it has all of the data on the local demographics. It's helpful to see the household income and the amount of people who rent compared to buy. Use as many free tools as you can and just dig hard, your skills will sharpen and you'll be doing this successfully in your sleep! ;)

Best of success!

How to analyze deals for beginners

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