How I Quickly Analyze a Rental Property for Cash Flow | BiggerPockets

hey guys this is brandon with bigger pockets and today i wanted to analyze a property that i found on the mls this came from my agent this lead came from my agent today a triplex that was listed before it went pending and then it came back on the market again so i wanted to analyze it together because i mean i was going to analyze myself and i thought why don't i just record the whole process so i did it's about 23 24 minutes long and i analyzed the entire triplex exactly as i would in real life i mean i really was analyzing it and i come up with a price that i think it's worth buying it at so i thought you would find this helpful if you did make sure i'm putting i'm putting this on both youtube and in the bigger pockets forum so jump in leave a comment leave a questions anything we have about the property let's kind of work through this together let me know your thoughts on the property do you like it so whether you're watching this on youtube or on the forums let me know what you think just down below in the comment area and uh let's talk about it and again i'm going to be using the bigger pockets property analysis software which you can get at biggerpockets.com analysis but you could do this by hand or you could do it with like a fancy spreadsheet or something like that but i find it probably easiest to use the rental property calculator that we have on bigger pockets so that's pretty much how it works i will uh i'll let you get to it and watch it so here we go this is the uh simpson avenue hokwim triplex analysis enjoy this is the property it's 2717 simpson avenue in hoax whim washington good rental history with two two bedroom apartments and one one bedroom apartment unit one has a washer dryer hookup unit includes two lots interesting second lot is a large yard rv parking with sewer hookups plus additional off-street parking new electrical service january 2015. that's cool close to the ymca and other amenities unit 3 is not rented and is used by the seller so somebody's house hacking this rents are low due to long-term tenants a proximal market projected income with all three units occupied 1600 a month subject to tenant rights all right so let's look at some quick pictures of the thing i actually driven by this property a lot because i go to the ymca quite a bit or i used to anyway and if i actually like this property it's in really good condition on the outside i never seen inside until looking at these pictures right now but it actually looks really well cared for looks like somebody's living in there that knows what they're doing i mean obviously you could probably use some more standard paint colors but um but overall i mean it looks a little bit dated but as a rental in this area that's probably pretty normal i might replace a countertops in that unit at some point but overall i mean that looks really nice white walls um got a bathtub in there clawfoot it's kind of neat anyway so there's a picture it's got that huge yard which seems like it'd be a good thing but i'm actually thinking that might not be a great thing only because then you've got to pay somebody to mow that lawn it's a huge lawn it looks like and if it's a triplex they're not going to take care of themselves likely but you never know so this property is interesting this property does require flood insurance this is an area that is located in a uh what's called a 100 year flood plain so i'm going to have to definitely factor that in i have a couple other properties in this exact area so and the area is not bad i mean by the ymca it's not high class but it's not i mean i would probably put it in as a c plus neighborhood and from what i can tell it doesn't need much work it looks like but again i've seen this property a lot i like it it's kind of cool so let's analyze this together uh to do this i'm gonna start by going over to biggerpockets.com calc uh if you're logged in if you're not logged in go to analysis and you're gonna end up uh using the calculator um let's see free free biggerpockets members can use it up to like five times i think and then pro members can use it unlimited uh so let's see i'm going to what am i going to call this i'm going to call this a simpson oakwim triplex just so i know in the future i can also put the address on there if i wanted to what's the address 27 17. and then the address again was 2717. i think i'll just copy and paste for simplicity reasons let's say hokum washington okay annual property taxes now if it didn't tell me it sometimes will tell me on this information right there 1307. if it didn't tell me i could have looked it up on the county records but uh and again if you're ever analyzing a deal and you're not sure you can always hover under these little over these little question mark things and it'll actually walk you through the process for each and every field that you got to enter things in it so if you're again you're not sure you can do that now to do a picture i'm going to go like this i'm going to take a screenshot here ignore my messages let's see screenshot there and then i'm just going to drag it from my desktop onto this little choose file because it's a mac and you can do that property sales description good rental history oops just copy this area and i'm going to paste it in there okay next step purchase price what are they asking for this thing 115. all right i'll go ahead and uh put in that full value we can change that later and figure out what is it worth after it's fixed up well actually it's probably worth what they're asking because it doesn't need a lot of work so i doubt they're underpricing it purchase closing costs well to buy this thing again if you're not sure hover over the little question mark thing but to buy this thing for me i'm probably looking at around twenty five hundred dollars in closing costs uh repairs didn't look like i need much i like to always include a little bit though at least because when you buy a property it always needs something in fact i'm actually going to do 5 000 because it said one person was living in one of the units which means that they may have lived there for a while it may need some work maybe new carpet i'm not sure again we can change these numbers later depending on what we find out but we're just doing a quick analysis now so down payment what would i put down on this property you know as a multi-family property it's residential still so i think i can get by with 20 down that automatically computes my loan amount over here my loan interest rate right now is about 4.875 is pretty typical i'm gonna not charging not gonna have any points by lender or other charges i don't worry about that because i kind of included that up here with my purchase closing costs uh let's see amortized over 30 years because it's residential commercials typically 20 25. i don't have to worry about cap rate because it's not a commercial property that's typically used for that and now gross monthly rent now i'm gonna they said what the usual is but i'm not even over look at what theirs is it said it was a two bedroom so i don't care about their 1600 what they think but it is a two bedroom one bath a two bedroom one bath and a one bedroom one bath so i know that typically of two bedroom one bath is gonna rent for about 550 a month uh in this area 550 a month for both of those and one of them if it's on the main floor because it looks a bit more like a house i actually probably could get a little bit more than 550 but let's just keep this thing conservative and then for unit c which is a one bedroom one bath probably looking about 4.95 if it's pretty nice um other monthly income i don't i didn't see any laundry they didn't mention laundry income so i'm gonna assume there's no laundry mat or a machine i'm going to assume there's nothing like that they didn't say there was a washer dryer in one of the units so let's not put anything there electricity now we don't have to pay that because tenant will pay it but we are going to have to pay the water bill and we're looking at probably 150 bucks a month in this area for water if you're not sure you can always call up your local water department or you can just ask the agent who's selling the property or your agent hey can you find out what the typical water's been over the last few months there but i have another triplex in this area we're looking at about 150 a month for water and sewer garbage we're looking at probably 60 bucks a month for that 20 bucks a month per that's my area again yours might be a little different and then insurance on this thing is probably gonna run about 75 a month that's about what my other triplex is and now other monthly expenses this is where i could put things like snow removal which i don't have to do but i'm gonna have landscaping to worry about so i'm gonna hit add add expense and i'm gonna call this landscaping uh and i only have to mow the lawn half the year but it's probably gonna be twice a month half the year so what that averages out to you know once a month all year which each time is gonna be 25 bucks so i'm looking at somewhere between around maybe 20 bucks to get a mode maybe 30 bucks somewhere in there let's just say worst case scenario it was 30 dollars so i go 30 times uh well we do it twice a month times about six months a year really about 360. now i'm going to divide that by 12 to get our monthly cost so on average we're spending about 30 bucks a month for landscaping and then one more expense we have to worry about is flood insurance because flood insurance this neighborhood is in a flood zone or this is a flood zone now i don't worry about this property flooding i'm sure uh typically it doesn't and if it did you know flood insurance would cover it so i'm gonna make sure i budget for that so i'm gonna go ahead and budget uh probably flood insurance right now on my other triplex in this area i think right about 100 a month might be slightly more than that but i think that's probably good for now all right now we got vacancy in my area we usually run less than five percent vacancy because we manage our own repairs and maintenance on this property it looks pretty nice so i'm gonna keep it pretty low at about five percent but my capex i'm gonna put up at 10 this is those big items that eventually need to be replaced meaning things like the uh you know roof um and how did the roof look on this thing anyway oh yeah it looks like a newer roof i don't see any moss i don't see anything curling shingles so i'm going to say capital expenditure of 10 but things like parking lot new siding things like that just those big things appliances carpet the things that aren't just minor maintenance and then next i'm going to do the property management fees now we're going to manage this property myself and so i could leave this blank however i i'm not always going to manage this property myself so i'm going to calculate what the typical property management fee is around my area because again i don't want to manage this forever and now income increases per year what does the future look like we don't have to do anything here but you know i will so income increases per year i'll say probably i think inter income's gonna go up by maybe one percent the property value will probably go up by one percent and expense is probably one percent per year maybe that's a little bit under knowing that inflation's around two percent but you know that's okay i don't like to usually think too much about future assumptions but especially on a cash flow property like this this is not going to go up in value very fast this is going to be pretty normal all right so before i get down to the numbers what do you guys think good deal or bad deal good deal or bad deal i'd ask you to vote but i know you're not live because you're watching this video later so uh let's look at this so there's the information and according to our numbers here the important information that we care about mostly is in this gray area we got our monthly income of 19 or 15.95 hey it's actually pretty close to what they said they said 1600 a month is what they estimate and i estimate almost exactly the same so that's cool uh monthly expenses of 14.89 and if you're wondering what those are they're all broken down right here for you and then we have our monthly cash flow this is a big number 105 dollars a month we got our cap rates we're not really going to worry about that again because we're not dealing with uh we're not dealing with our uh you know commercial property but what i care about is these two numbers mostly and actually technically these three numbers the monthly cash flow the cash on cash return and our total cash needed because i want to know this is how much if i finance it with a 20 down payment this is how much total i'm going to need to come with and how did that number come up well we needed 23 000 for a down payment we also needed a uh let's see the where was it purchase closing cost of 2500 and the repair cost of 5 000. so add all that together the 23 plus the 5 plus the 2500 and you're going to get 122 500 and we know that the loan amount was a 20 loan was 92 which means that we have to come up with 30 000. so that's just why i like this number here it just makes it a lot faster and so at this price point we can see that i'm making 105 dollars a month at a four percent return on investment is that good that's the real question here is that a good deal well before i get to that let me show you the rest of the page so again we can see all of our numbers here i can see our breakdown of our expenses our breakdown of income where it all come from and then i can look at the 50 rule now if you're familiar with the 50 rule uh you'll recognize that this property according to this this 50 rule it should produce 300 a month in cash flow the 50 rule simply says that on average half of the income so half of the sixteen hundred dollars or 15.95 is going to go out in expenses and operating expenses not including the mortgage and so what they're saying is 15.95 times 50 leaves us with 797 and then subtract our mortgage from that and we're left with 300 a month this is actually a really good example of why the 50 rule can be dangerous right because if somebody were to buy this property based only on the 50 rule they would think they're gonna get 300 a month in cash flow but i've shown up here i'm only probably getting 105 a month in cash flow over time now if i scroll down a little further i can see some other things like the income expense ratio in other words like the two percent rule it's at the 1.3 mark uh the total initial equity because i had to put that big down payment down i actually have uh the only equity i have is the fact that i put a down payment down uh growth rent multiplier and my debt coverage ratio i can look at those numbers don't worry about those if you don't know what they are but if you want to learn more you can find that info on bp i can look at uh the analysis over time in other words year one year two year three year four year ten twenty 30 and then i can look on this graph and kind of see all this cool stuff here too so i can see what the future is so right now we can see that the property value is if it goes up by one percent per year it's next year it's gonna be worth 116 then one whatever all the way up here to 143 144 146 okay and then down here i can see what the loan payoff is over 30 years paying the loan off and then i can see what my equity is as it climbs over time so including my down payment how much equity do i have i can also look at the future of cash flow and things like this like my income i can see what my cash flow is so my cash flow is looking at about a thousand twelve hundred bucks a year to start with by year five i'm up to fifteen hundred and then two thousand roughly so you know it climbs a little bit then once the loans paid off boom it jumps up to 9490 a year in cash flow so again this tells me a few things so and then one more thing i'll show you is you can download a pdf report if you would like to of this property and this pdf report actually there's two things you can do you can download it it takes about 10-15 seconds to generate so we'll let this generate real quickly here okay and here it is it just shows us the basic numbers we just came up with now what this is really helpful for is being able to give it to your lender or partner or spouse or whatever and so this is just kind of cool i like it being able to give somebody all this data especially if you're going to go finance it are going to give it to a hard money lender or your spouse and show them why it's a good or bad deal this is just invaluable now instead of just printing this out and whatever you can also share the pdf report click share pdf and it waits just a second we just sit here and wait probably about 10 seconds also it's got to generate this link and it's going to tell us a good link that we can send to people which is kind of cool all you have to do is click on it and it's copied to your clipboard now i can go send that to somebody else and say hey you know hey check out this link right here and there's the full link right there and if somebody clicks on it they get to go look at your pdf report so again you can email the pdf report without having to actually save the pdf you just email them a link that's good for seven days very cool all right so let's talk about this deal again is this a good deal well in my opinion i would say i probably would not buy i mean i would not buy this at this number and here's why because there's a four percent return on investment i could get better than that in the stock market right like i'm not making hardly any money on my money i want to make more than four percent i want to make 10 15 20 like i want to make good numbers i want to get way more than i can get from the stock market so now in some cases i will take a smaller cash on cash return in exchange for knowing that i produced a bunch of value in the property like for example let's say this property was actually worth about 200 000 well in that case that i might actually be interested in jumping in and buying the property because i know i can sell it someday and make a bunch more money but i can't this property is not going to be worth a lot more than what it is right now and so i don't have the ability to sell it it's not like i can flip it or sell it for a lot more money five years from now so for me 100 a month is not cutting it i want to see typically like i said a minimum 10 maybe even 15 cash on cash return unless there is really good appreciation reasons why i should accept a lower cash on cash return additionally another rule of thumb i like to use is i want to see a hundred dollars a month per unit per month on this property 100 per unit per month on this property and i don't see that here i see a hundred dollars total not good enough for me so now that begs the question though at what purchase price is this property worth it what purchase price well we made a few assumptions why don't we hit edit report and go back and look at it and uh you know nothing on page one is gonna change we'll keep that all the same but i do want to change the purchase price so i'm going to lower this purchase price down to let's say i offered them 95 000. would it be worth it at that point now i'm still going to say the after pair value might be 115 but i'm going to have to refigure our down payment so i'm going to click it again and it's going to come up with a new loan amount of 76 000 but i'll keep everything else the same still 30 years i'm going to keep the rent the same i'll keep the expenses the same i'm comfortable with all of this i'll keep all of this the same even and then i'm going to calculate the results let's see what we come up with now now is this a good deal well now we're looking at a monthly cash flow of 190 a month cash on cash return of 8.62 well now this is looking better and here's why yes it's only a cash on cash return of 8.62 however i'm also looking at the fact that this purchase price is a lot lower than what it's actually worth i think it's worth around 115 i think i could probably resell it for 115 in the future maybe to a homeowner who wants to house hack but i'm now getting a better deal so now it becomes a little more interesting but honestly still not enough i want to still get more than this i want more than 8.62 if i'm going to come up with 26 grand out of cash i want to get more than 200 a month in cash flow i want i want 300 i'm going to say that so you know what let's go back and edit the report again and this time i'm going to change one other figure instead oops press the button there we go 95 i'm going to change this down to again let's go 90 a little lower but instead i'm going to change my estimated repair cost to just a thousand because what if we got in the property and realized it didn't need any work i mean really nothing and so i put a thousand just in case there you know i need a new faucet or something but and now let's go see what happens to this we'll leave the rest the same we'll find out what happens what do you guys think are we looking at better numbers oh you know what i didn't do hold on i didn't uh i have to re and this is important to remember you have to make sure oops hold on next step you have to make sure you re-figure the down payment each time you change your purchase price because this number has to re-change so 20 down of a 90 000 loan next step next step if you don't do that then your cash flow is not going to change all right so what did it come up with now we're looking at 211 a month in cash flow now we're over the 200 mark but our cash on cash return is a whole lot better why because we have less cash needed remember before we were looking at almost 30 000 needed now we're looking at only 21 000. okay so now we need less money and we're making more cash flow therefore our cash on cash return is a heck of a lot better all right so we got our vacancy capex garbage management property taxes flood insurance landscaping principle and interest insurance water repairs all that good stuff added up and uh this deal is becoming more and more enticing to me but still honestly for me and my where i'm at today i probably still would not do it at an 11 cash on cash return maybe if there were no other deals i might look into this one but i think i can do better with other properties so for me this is a pretty borderline number ninety thousand but guess what let's figure it out where does this make it fun for me let's go one more time let's go purchase price this time of seventy thousand yeah we're gonna go real crazy here seventy thousand i gotta re-figure my down payment so it re-figures our loan amount next step calculate results and now we're looking at a 20 cash on cash return with a monthly cash flow of 296 a month this my friends is a number i would pay because i'm just about 300 a month that's 100 per unit per month a 20 return on investment is awesome i'm looking at 17.5 for total cash needed so what does this tell me tells me that at 70 000 that is my purchase price that is what i want to pay for this property so is that are they gonna accept that probably not i mean that's a full what is that thirty thousand forty thousand that's forty five thousand dollar discount i very much doubt they're going to accept it but guess what i might offer it anyway why because what's the worst they're going to say is no now here's a let's go to a little bit more advanced i want to know who owns this property graze harbor county parcel search this is my county assessors page i'm going to look up this property and just look at who owns it 27 17 about your county probably has this as well it's not going to be the exact same process but it's going to be pretty similar 2717 well there's two of them let's see which one it is it's where there's two that is not the property i can see that let's go second one by shirley savage there it is there's our property shirley savage owns it and uh the county assesses it at 86 000 which is not completely uncommon for the county to be way lower than what people are asking but still kind of interesting that they are they are they are a lot less i can look at the tax information as well and i can see that well she's current on her taxes if she were behind her taxes a couple years it might give me the indication that she's much more willing to take a lower price my guess is she's not too far behind so she probably won't take it but again it doesn't hurt to offer you know i could offer shirley 70 or i could just wait and see what happens but it doesn't really hurt to offer because you know you might offer on 10 properties and you'll get 10 no's but number 11 might be a yes and then i'd be looking at 300 a month so i mean this property just came up today on the market i just thought today why not one of you guys offer 70 000 see what happens and again there are some assumptions we'll need to verify we'll need to make sure that it only needs a thousand dollars worth of work we'll need to verify that you really can get a loan on it that flood insurance is really only going to be 100 bucks a month we'll need to verify that you know uh insurance was 75 and that water is 150. but this gives you a really good starting point so you know obviously by talking through this it took me what we do recording now for what i don't know 15 20 minutes uh maybe longer i could have done this entire analysis i didn't have to put the this information in i didn't have to put some of the stuff i could didn't have to upload a photo i could have just quickly burned through this thing without talking and probably had it done in four minutes or less i could have analyzed this whole deal in four or five minutes i could have played with the numbers and found this 70 000 number in probably five minutes or so and then i would know what number i wanted to do now what i offer in this property honestly i probably won't do it on this property only because i don't love the neighborhood i'm not gonna go out of my way necessarily but but you know what maybe i will i don't know uh i guess the point is everybody's goals are different your goals are different you this might be an ideal property for you for me eh it's probably not as ideal so that is typically ignore my cell phone going off that is typically how you can analyze a deal so if you have any questions of course you can jump on this thread i'm going to put this in the bigger pockets forum so you can check it out silence the cell phone from ringing somebody's calling me from utah don't know who that is anyway uh you can comment and ask any questions you have or comments or or concerns or whatever in the thread below i just want to kind of open up this conversation to show you guys a little bit of how i analyze a triplex so with that thank you guys for listening and have a great day talk to you later bye

Channel: BiggerPockets

Views: 513,305

Rating: 4.9299703 out of 5

Keywords: Real Estate Investing, Rental Properties

Id: hrOR9mYk0Vs

Length: 24min 24sec (1464 seconds)

Published: Fri Nov 06 2015