On many occasions I have taken time to read through the forums. More often than not, the conversations are specifically about the numbers. Although the majority of what I write and what I teach has to do with communication and building trust and relationships, the business is ultimately run by these same numbers members keep asking about.
I have had other individuals recently inbox me concerning the 50% rule and the 2% rule, and honestly, I have been in Real Estate for most of my life and have still not figured those out! What I do live by though is a very, in my opinion, simple formula that I refer to as the “Engelo Rule.”
Haha, just kidding — you may call it whatever you wish; just know that it works.
As always I strive to do everything possible to keep the numbers simple. The more complex you make something, the less clear it becomes.
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This is How I Do My Estimates
For example: The purchase price of the property is $50,000, and it rents for $1,000pm.
(What an AWESOME find!)
$1,000 monthly rent x 12months = $12,000pa
The expenses would include 10% property management ($1,200pa), annual taxes of $1,000pa and annual insurance of $600pa.
$12,000 rent per year – $2,800 yearly expenses (PM, Taxes, Insurance) = $9,200pa
I would also always add a margin of safety and deduction, which would be dependent on the class/area. The average is to take off a further 10% for “unexpected maintenance and vacancy.”
So $9,200 – $920 (10%) = NET $8,280 yearly cashflow
Once you have the NET cashflow figure, this figure is then divided with the purchase price of $50,000 and then you will get a sum of 0.1656 which would mean a NET CAP of 16.5%.
Also, please keep in mind that the above calculation is used when the purchase is made with cash only. A few minor adjustments would be needed when using finance, but to keep things simple I have decided to leave those estimates out.
As always, researching your market by talking to trusted partners on the ground allows you to know firsthand what a good rental figure would be and if there are any more hidden costs associated with the city or the property management used.
This is not one of my longest blogs or the most profound, but I live by this simple formula when crunching the numbers on all of my deals.
How do you crunch your numbers? Will you use my formula in the future?
I truly appreciate your time, and feel free to comment below.