If you’re like me, the thought of doing math makes me cringe. Doing algebra nearly doubles me over in pain. But, I love real estate and all the analytics that go with it. After all, a house is just a house until you run the numbers enough to know it’s a deal, right? The nerd in me really gets excited when the figures and calculations point toward “Profit!” (Pass the pocket protector, please!)

So, let’s check in on your inner nerd. Here’s a pop quiz to see where you’re at on some RE Math. Don’t be scared! Grab a pencil and paper and see how many you can get correct (without peeking at the answers!)

**How to Invest in Real Estate While Working a Full-Time Job**

Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.

## Question #1) The Hard Money Lender – How Much Do You Need?

You just found a pre-foreclosure but the seller wants out, and FAST. The comps make sense, and you can offer $145,000 and still make a decent amount after you resell the property.

But, you don’t have all the funds to pay the purchase price in full. So, you call your local hard money lender and they think your purchase price makes sense as well. They can fund you up to 80% of your purchase price, but it looks like you’ll still have to come in with closing costs and HM fees. They charge 2% upfront on their loan amount. Plus your taxes, title and insurance fees are going to run you 3.5% of the purchase price.

How much money do you have to come in out of pocket?

### Breakdown:

Let’s start by looking at the HM (hard money) loan. Take 80% of your purchase price (.8*145,000) = $116,000

The HM lender also charges 2 points upfront of the loan amount. So calculate (.02*116,000) = $2,320

Now, taxes, title, and other charges are 3.5% of the total purchase price, which looks like (.035*145,000)= $5,075

So your final calculation would look like $145,000 – $116,000 (HM loan) = $29,000 down payment+ $5,075 closing costs + $2,320 HM fees= $36,395

**The Answer**: You’d have to bring in funds for $36,395 to close the deal.

## #2) Which Lender is Better

Hard money lenders are out there, ready to fund your solid deals. Although their particulars might seem very close, paying attention to fees, minimum interest due, and points can save or cost you hundreds, if not thousands.

Let’s use the same scenario as before. You pick up a pre-foreclosure and need a HM loan. The lender at .80 of purchase price with 2 points upfront seems like a good deal.

But, you saw a Hard Money Lender List on BiggerPockets and thought to reach out to some other people in your area, to shop rates.

John the Lender researches your deal and agrees your purchase price looks good. His terms are 80% of the purchase price at 16% interest, with a 2 points and one months interest minimum (let’s say Lender #1 does not have a minimum). You already have another buyer lined up who plans to close 22 days from your acquisition date (and actually does close).

Which HM lender has the better deal for this scenario?

### Breakdown:

We already calculated out the first HM loan, which will cost you $2,320 in upfront points.

If he/she is charging 18% interest, you’d break down your per diem (daily cost) like this

116,000 * .18 = $20,880

This is the total cost of interest on the loan. However, HM loans are meant for short term, hence the high interest rates.

So, let’s divide the total figure by 12 months

20,880/12 = $1,740

This is what your monthly loan payment will be. Let’s break it down further by diving each month into days

1,740 / 30 = $58

So, it’s costing you $58 every day you hold this house. If you hold it for 22 days, the cost is $1,276.00

Lender 1 costs you $2,320 in fees plus $1,276.00 in interest for a total of $3,596.00

Now, we’ll do the same for Lender 2, but a little quicker.

116,000*.16 = 18,560/12 = $1,546.66/30 = $51.55

2 points = $2,320

1 months minimum interest = $1,546.66

Total = $3,866.66

**The Answer: ***So, even though Lender 2 had a lower interest rate, you are still saving money by using Lender #1, for a difference of about $270.00. Lender one is the better deal for this scenario. *

## #3) How Much Did He Pay?

You and your buddy are at a BBQ and he’s bragging about this killer deal he just closed on. He doesn’t share all his numbers but he says “Dude, I just sold this place for $140,320, and cleared a 25% profit. Isn’t that like, a stellar spread?!”

You, being a curious investor, want to know what he got it for. (Tax records don’t show it yet and he won’t spill the beans.)

What did he pay for the property? Here’s how to run those figures:

### Breakdown:

Remember, appreciation is an increase in value from any cause. A profit it based on what you pay for something (purchase price), NOT what you sell it for.

Write down the %’s you know and the figure missing %. (Purchase price is 100%; profit is 25% so sales price is 125%)

Sales price (including profit) 125% $140,320

Plus profit 25%

Purchase price 100% ??

Next, write down the $140,320 figure on the sales price line.

Divide the sales price figure by the ($140,320) by the % on the same line (125%) and it will give the $$ figure on the 100% line ($140,320 / 1.25 = $112,256)

**The Answer:**So, your buddy got the house for $112,256.

Whew, you’re done with the pop quiz! I know you are saying, but Tracy, I can plug figures into my excel sheet or fancy software and they do all this for me. Be that as it may, it’s still important to understand HOW things are broken down. (this sounds like the ghosts of Math Teachers Past!)

*So, how did you do? Does this type of fact-figuring come second nature to you or was this an introduction? *

Photo: Mikey Angels

## 15 Comments

A couple of year’s ago, a bunch of math questions were posted in the forums by Nick Johnson – specifically the one given by this next link (I think you already know him):

https://www.biggerpockets.com/users/motiv8td

Anyway, here are his forum posts that I just mentioned:

https://www.biggerpockets.com/forums/56/topics/62714-real-estate-investing-math-applications

https://www.biggerpockets.com/forums/21/topics/62955-more-math-and-some-updates-on-brokerages

https://www.biggerpockets.com/forums/56/topics/63140-how-about-some-more-math-

https://www.biggerpockets.com/forums/56/topics/63874-a-math-question

Nice, thanks Steve! I’ll have to check these out and see how I do. Appreciate the additional resources for the readers.

I LOVE doing these types of math problems! It keeps me on my toes. I practice this all the time, and not just in real estate. It’s the key to thinking on your feet when some sales person is talking to your face and you need to quickly figure out if he or she is serious or pulling a fast one.

#1 was basically 20% down payment + 2% + 3.5% in fees = 25.5%, or roughly one-quarter of the price. Divide by four with some quick rounding and you can get pretty close.

In #3, increasing from 80% value to 100% value is a 25% relative increase. So to work backwards, you need to dock 20%. Just double the purchase price and shift the decimal point to the left one slot.

Love it Greg, you’d be the dude in math class I sit next to, for sure 🙂

Maybe I missed it, but I don’t think the interest rate for lender #1 was included in the question. Sorry to nitpick, but folks will need that I they’re actually testing themselves.

Thanks for the quiz. Fun!

Hi Jake, it was included in the breakdown section of question #2 but you’re right, it wasn’t very obviously stated. I think I was too tired when I was writing this and was going off the natural assumption of a 18% loan. Good catch, shows you’re paying attention!

I’m new here, is 18% common for a hard money loan? Rephrased: what’s the common range for these types of loans?

Hi Jake, 18% is common, yes. The shorter the loan, typically the higher the interest rate. For example, a 6 month loan for a fix and flip will be around 18%, with the lender funding anywhere from 65-80% of the purchase price (NOT the full market value).

To the other end, a borrower might use a private money lender for a 24 month loan at around 13%, but the loan to cost may be lower, say 65% and below.

I think it will depend on your area.

Going rates will vary.

If Tracy says 18% is common near her I believe that, but that would be pretty high around here. 14-15% seems to be the norm here with not being THAT hard to find 12%. However it is pretty rare to see less than 3points with 4 being common.

This just goes to Tracy’s point about being able to evaluate which lender will work for you and your deal.

Wait you can’t possibly be saying that if I buy the current “revolutionary” software it won’t allow me the set my business on autopilot and just sit back and wait for the millions to roll in even without any knowledge and experience in real estate???

Needing a basic understanding of what you are doing?

Seems far fetched to me, didn’t find a single guru course based on that!

🙂

Yes, sorry to disappoint, Shaun…I can sell you a calculator for $9.99 though! 😉

Wait, a business in the box? And I don’t need to know anything about realestate? Great! All kidding aside though my head is spinning a little from the math 🙂

Jim.

Good article Tracy. But the numbers that are in your example, can they be used in CA??

Hi Mark, the examples aren’t really region specific. They’re there just for the “fun” of doing this type of math.

Thanks. Still enjoyed it….