How to analyze a deal to rent out?

Question

What do you use to analyze potential deals for rentals? I hear CAP rate is used a lot but I am interested to hear what all people include in calculating that because I have seen many people calculate it differently.

I see a lot of deals $20-$50k that rent for $500-1000/month

Sharad M. · Answer

Bryan C.

You can call it whatever you like, ROI, CAP, COC, etc. At the end of the day two things should matter, what is the return you are getting on your money and the return on your time.

Some people have more time than money and vice versa and depending on your situation and goals, you should see what strategy works best for you.

For example, if managed well, you will generally get the best return of your money in Class D rental, but your return on time will be lowest because Class D requires most management.

OTOH, Class A property will give generally give you the best return on your time, but lowest return on your money because they are relatively more expensive compared to the rental rate.

Hope it makes sense.

Elizabeth Colegrove · Answer

I truly understand where you are coming from! My husband and I spent the first two years of our marriage paying off debt. So it's been really hard to start acquiring. The biggest thing I did was put as little down and buy as cheap as possible! Than we don't pull money out through refinance. We fund through frugal living and using the cash flow!

Anna Watkins · Answer

@Sharad M.  - I've never looked at that balance between time and money in terms of the "class" of the property.  Thanks, that was really well said and helps me think about my next purchase.

@Elizabeth  Colegrove  - same to you, in terms of the leverage and cash invested and returns.  I grew up hating debt and wanting everything to be paid off, so it's harder to think of huge leverage as a good thing (but I'm getting there!). I have tons of equity in my personal residence, but I just can't bring myself to borrow against it so close to 'free and clear' time.  It'd be like backsliding.

Bryan C. · Answer

Thanks Sharad.

Jessica Martin · Answer

@Elizabeth  Colegrove

Thank you for the information

Elizabeth Colegrove · Answer

@Jessica Martin

I am a buy and hold investor, i.e. I buy rentals. So leverage mean is where I mortgage as much of the house as possible. Cash on cash returns, means evaluating the profit of the deal based on my cash flow based on the money I put into the house not the over all cost.

Jessica Martin · Answer

@Elizabeth  Colegrove

I was reading though this post for my own curiosity on how rentals work as well, but Im not sure I understand your response. I'm new to REI. Ive been studying more on wholesaling and fix-n-flips. Can you explain more in detail about your comment.

What do you mean by "Cash on cash" and leverage?

Thank you!

Elizabeth Colegrove · Answer

I personally like to look at the cash on cash rate of return. I LOVE leverage, and try to leverage as much as possible. So this allows me to look at the "true" return of my deal.

JT Spangler · Answer

Send those deals to me, because I'd like to dig more into a property that costs 20k and rents for $500/mo.

Personally, I'm not nearly as experienced as many, but I like to look at cashflow (because I have monthly passive income goals I want to work towards) and cash on cash (because I want to make sure the money of mine I invest is returning well for me).