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.”

Related: Real Estate Investing: a Numbers Game

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.

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.

## 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.

Related: The Importance of Knowing Your Numbers in Real Estate

## Conclusion

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.

### About Author

Engelo Rumora, the Real Estate Dingo and your favorite Australian, quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He is currently in the process of launching an ICO that will “Decentralize The Real Estate Industry.” He’s also known for giving houses away to people in need and his crazy videos on YouTube. His life’s mission is to be remembered as someone who gave it his all and gave it all away.

### 29 Comments

1. Hey Engelo,

Great breakdown of how simple it can be to calculate potential returns. Although, at least in my area, 10% for repairs AND vacancies is pretty low. I usually plan at least 20% for these items, but my properties are older.

Thanks for the post!

• Hi Brandon,

Thanks for your comment.

The 10% margin of safety can always be tweaked anyway the investor feels fit. Some factors to consider are: age of property (as you mentioned), class of area, class of tenant, property management used and proximity to the property. Many investors that invest close to home can do the minor fixes themselves and save few % points.

I always suggest overestimating expenses and underestimating income. If the numbers still look good and make sense, then you might be onto a winner.

Thanks and have a great day.

2. OK – so 16.5 is a number you would find acceptable?

So what cap rate number would you consider too low to be worthwhile?

stephen
————

• Hi Stephen,

Thanks for your comment.

The deal mentioned in the blog was just an example.

If buying turnkey properties I believe you will find these figures to be the average in the Midwest.

A Class – 8-10%
B Class – 13-15%
C Class – 18-20%

I hope that helps.

Thanks and have a great day.

• Also correspondingly the expense ratio used to calc NOI for A,B,C is:

A expense ratio: 30% or so.
B 40-50%
C 50%-60%

So the NOI for the example given above if it’s a typical B property, 40% expense ratio, or being conservative 50% expenses (includes roofs, new AC units, rehabbing after 5 yrs with new floors, appliances etc adds up to an easy 50% expense ratio).

1000 x 12 x .5 = \$6k NOI

6k/50k = 12% cap rate.

3. I did the math,… and my new built purchase has a NET CAP of 5.39%. I have no idea if that is
good or bad. All I know is that the rent covers my fixed expenses. This is the Central Coast of
California. Anything left will be sucked up by IRS and CA Taxes.
Engelo, please confirm what CAP RATE range are we looking for?

• you are looking for the cap rate that gets you your desired goals. Where I live in tampa, I can go for much lower cap rates but in great neighborhood with high long term potential for appreciaton or I can go to lower quality neighborhoods and get huge cap rates but minimal opportunity for appreciation. it all depends on what you are looking for.

• Hi Dave,

Thanks for your comment.

As you mentioned, every property should be purchased with the end goal in mind. I am building my portfolio with only B class properties. Lower cap rates but great exit strategies and potential for capital growth if it ever occurs.

Once I have between 15-20 properties and ZERO debt, I will consider buying lower end homes with higher potential cap rates.

Thanks and have a great day.

• Hi Lin,

Thanks for your comment.

The cap rates on the East and West Coast of the US tend to be much lower than the Midwest for example. History has shown they offer much better growth tho.

I base my decisions on the numbers in the deal and not speculation of capital appreciation.

In my opinion very good NET CAP is around 15%.

Having feet on the ground and doing the work yourself can make those numbers even better.

I just bought an A class property for my personal porftolio that is showing a 20% NET CAP. Once renovations are completed, I will also have a \$30,000 equity gain.

Thanks and have a great day.

4. Thank you for the response, Dave. I like this KISS returns system, Engelo. I am 74 y.o. and I just got a fixed 30 loan with this new build. I found the costs for new build, and loan fees are heavy, compared to the short sales and foreclosures , previously purchased for cash.
I enjoy Real Estate, and consider Shelter , a basic need of Mankind.

• Thanks Lin,

I always try to keep everything at KISS lol

I have been involved in hundreds of Real Estate transactions over the years and have never decided to take on a development project. I see it as higher risk due to many things being out of the investors hands.

Very decent profits can be made on the foreclosure deals as you mentioned. A mentor of mine does between 2-15 retail flips to home owners per month.

His minimum profit is \$40,000 per deal.

I think those numbers speak for themselves. Most require cosmetic rehabs without involving the city on any plan approvals, etc….

Thanks and have a great day.

5. Great article. I will try to keep this calculation method for my next rental purchase. I used to do the rough estimate of mortgage taxes ins and vacancy etc to get approx total cost. These calculations are very good when you have to decide quickly on purchasing the property on approx what the cash flow can be. Great article once again thanks for helping with one more quick tool to analyze the rental deal.
Have a great day Sir

• Hi Raj,

Thanks for your comment.

Always discount a few extra % points in your margin of safety and you shouldn’t have a problem.

Have a great day.

6. This article is short and to the point. Thanks for sharing.

Linda

• Thanks Linda,

I am glad you liked it 😉

Have a great day.

7. Great post Engelo! I try to keep crunching numbers easy & painless but I find myself lost/stuck trying to figure out the mortgage payments or payments to seller (if we agreed upon a seller financing) as well as figuring out all the taxes (property, school, county/borough). Zillow shows property taxes but not the total sum of all the taxes. It gets frustating.

• Hi Ayodeji,

Thanks for your comment.

You should be able to get all those figures on the count website.

Here in Ohio, its quite simple.

Also, you can just ask the lender for the annual lump sum loan amount.

Then just deduct both from the existing “net” cashflow figure.

Thanks and have a great day.

• Ok I wasn’t able to find the school tax info but I’ll reach out to the the county office for the numbers. Thanks. I was just hoping to get the info I needed online as oppose to be on hold over the phone.
I’m looking to buy and hold turn key multifamily houses. Any advice?

• Ok cool,

Yep 🙂

Feel free to shoot me an email – [email protected]

I would be happy to find out more about what you’re looking for and assist in anyway.

Thanks

8. Thanks Engelo, I just sent you an email.

9. Hi Engelo.

Thanks for this short & sweet article. I’d be interested in knowing the few minor adjustments that would be needed if finance were used. I came across a post of yours on Linkedin (I follow the Real Estate topic), where you linked in this article.

Thanks again.

• Thanks Brad,

Feel free to email me at [email protected]

Happy to help.

Have a great day.

10. Great article, Engelo. Running the numbers properly is crucial in knowing if you have a great deal on your hands or not. Keeping it simple is always my goal as well. Thanks!

11. “Keep it simple” is one of the rules that I live by in life… This simple math and evaluation of a property is perfect. I appreciate it, Engelo!

• Thanks mate,

Have a great weekend.

12. I love the simplicity! Thanks for breaking it down so simply, makes it much less intimidating for newbies such as myself 🙂

• My pleasure Kayla,

Much success and keep the dream alive 🙂

13. Everything is much better when put in layman’s terms! Great article, Engelo.

• Thanks mate,

I try to make things simple with everything except my clothing.

The more blue, yellow and other crazy colors, the better hahaha

Have a great day 🙂