How To Analyze A Rental Property For Beginners In 2024

what's up YouTube in today's video we're going to talk about how to analyze a rental property for absolute beginners now a lot of you are brand new to real estate investing and the biggest question is if you're going to get into a good deal or not so today I'm going to be showing you the different formulas and spreadsheets that I use to determine if a deal is good or not if you guys don't know who I am my name is Sean and I make real estate easy my wife and I own 34 units in different states such as California Georgia Texas and Florida these are mostly one to four unit properties and we've been doing it since 2016. so almost seven years now now if you watch this video all the way to the end and follow us step by step then you should know exactly how to analyze a deal and we're even going to give you a special bonus if you watch this video all the way until the end now before we start analyzing deals we need to determine what a good deal means to us because I change it depending on our goals for example if you're looking for some quick money then you'll be more interested in a Fix and Flip but if you want something that's more passive and long term then you might want to start looking at deals that are better for cash flow so you have to think out what your own goals are so today we're going to be focusing on buying long-term Investments because that's something that my wife and I really like so the factors that we need to consider are the purchase price of the property how much can rent actually go for in a specific market and you know you can't just assume that your property will rent for you know two times what the average rent will be so you need to analyze all those things too you also need to consider the location including different factors like job growth population growth your crime rate Etc so how do you determine what a good deal is very high level point of view I look at the one percent rule at the start because oftentimes if a property can't even fit the one percent rule then it's not really worth my time to dig deeper now the one percent rule simply states that the monthly gross rent should be one percent or higher of the total purchase price so as an example if I'm looking at a property that would cost 150 000 for purchase price then I should be getting 1 500 or more every single month on that event so is it hard to get the one percent rule it can be and definitely not every single Market will work so for example if we're looking at the Bay Area you're buying properties for at least one million dollars the rent's there very rarely go over four thousand dollars a month so that's 0.4 and is nowhere close to the one percent rule so I personally don't buy any rental properties in the Bay Area and I try to look at a state so this example of that is some of my properties in Jacksonville you know I bought one property for eighty thousand dollars and on day one it was already renting for 900 a month so that means it past the one percent rule so again that's just the first check it doesn't mean that these properties are going to be great because again you can have a property that satisfies a one percent rule but may not actually be good because of the other factors another thing that I really like to look at is the cash on cash return so that means the net cash flow after paying your property management fees utilities property taxes mortgages and other miscellates expenses and dividing it all by the money that I put into the property which includes my down payment my closing costs and any repairs I need to get the property ready I typically want to cash on cash return of over 10 now of course if you're buying a property without a loan with pure cash then typically your cash flow cash return is going to be lower but by buying your property with cash then obviously you have the stability of knowing that you won't have a mortgage payment to make and your actual cash flow dollar amount is going to be higher when we were first getting started we would always Finance everything to the max but now that we have more income and now that we're pretty secure with our finances we're actually buying a lot of properties with cash we know that from the Safety and Security point of view we're definitely a lot safer if a few of our properties are vacant for a couple of months you know it's okay because we don't have a huge mortgage overhead so now we're going to go into an actual example of a property and analyze it together so this is a random property that I found on Zillow this is a deal that's in Cincinnati it's 185 000 three bedroom two bathroom 962 square feet from my initial point of view I can tell this house looks really nice right it looks updated if I scroll down a little bit to this pricing area I could see that it was recently sold for 84 000 just a few months ago and that tells you that this is a flipped property as an investor I will probably stay away from a flip property but we're going to continue doing this analysis just so we can see everything also I noticed that this is only 962 square feet so that's actually pretty small for a three bedroom two bath typically for a three bedroom two bath I want to see you know 1 250 square feet or above ideally 1500 square feet so let's see if these numbers make sense what I'm going to do is I'm going to go to my property analysis calculator now again if you guys don't have this you can make one yourself or you can buy this with the link down below and I'm gonna put down 185 000 here for improvements this is where you talk about any kind of additions or if you want to pay for any repairs in this case I'm gonna put zero my down payment percentage I want to put as little as possible so let's put 20 percent interest rates now can vary but let's put 6.5 for now I'm gonna do a 30-year mortgage and to find the total rents per month I also like to use Zillow so I close this out and I can see this is like the area where all the properties are right this is the area where this listing is so instead of looking for sale I click on for rent I'm gonna apply and do something similar right three bedroom two bathroom home type I want to look at houses only so you can see here that we have some properties here you know 1 300 it's a little bit bigger oh this one 1400 not bad pretty good condition one thousand four hundred you have some here but then the square footage is way bigger so realistically speaking I think we're going to be somewhere between here right the 1 300 and 1400 again to be a little bit more conservative maybe do 1250 just because the size is a little bit smaller other Revenue per month you know if you are charging for a pet fees if you're charging for laundry fees you can add other Revenue per month but Jerry speaking is probably gonna be zero uh vacancy rate we do like to add a five percent vacancy rate sometimes ten percent because if your property is vacant then it typically takes about two weeks or so to actually you know renovate the property make it ready and get new 10 inside annual revenue increase you know we assume that rents go up every single year and to be safe I play three percent annual operating expense increase so same thing like how much more are your things going to be over time this is basically with inflation so you can do two percent or three percent here just a three percent annual appreciation like how much you think this property is going to increase in value properties typically increase between three and five percent every single year so you can do three percent again here too again these are all numbers that we like to use to visualize what's going to happen these are not predictions right like this is never going to be perfect but do everything and take out the grain of salt property taxes in Cincinnati are typically two percent of the purchase price Property Management fees you're probably paying 10 every single month one unit here now to find the insurance what I like to do is go on steadily steadily is a nationwide insurance provider that specializes in creating landlord policies so if you want to check out satellite go ahead and click on the link down below as well type in the address here click on the get quote you can see that's a single family amazing construction type 1962 and 962 square feet so they pull all this data from tax records so it should be very similar to what you see on Zillow here you can type if it's a long-term rental property or if it's something you're going to rent on Airbnb on a short-term basis it's gonna be fully occupied or it's gonna be some vacancy after you click continue you go on this page and you put in your own information now after you type this get a quote you'll know exactly what to put on your spreadsheet so for now let's just put one thousand dollars we're gonna do zero for advertising because our property managers usually handle that we're gonna do zero for utilities because our tenants usually pay for their utilities this property doesn't have an HOA I believe so HOA dues should be zero now this line item for miscellaneous is if you have any miscellaneous costs again we'll play Zero after you're built we'll put 1962. so after putting in all these numbers we can see if this property is a good deal or Not So based on this top area here we know this is a bad deal right from the start um again this doesn't satisfy the one percent rule at all you know it's 185 000 so you should be getting 1850 a month you're only getting 12.50 a month which means that your annual cash flow is going to be negative 4 675. you're gonna have a negative 11.49 cash on cash return on investment your monthly cash flow is also going to be negative 389 so overall this is a terrible deal you don't want to do this one but let's say we change the numbers a little bit let's say we looked at a different property with similar values except this one did hit the one percent rule like I said this is a flip property so you probably don't want this one but just a few months ago you could buy this one for 84 Grand right so eighty four thousand dollars and let's say you put your own money into it let's say you put you know 30 000 into it to renovate it yourself ah now it looks much better so you can see here your annual cash flow is going to be 3473 dollars you're gonna have 7.16 cash on cash Roi and your monthly cash flow is 289 after all expenses so it's actually pretty decent with my calculator I automatically assume we have a 10 expense ratio which means that for every dollar you get 10 of that will be in reserves for a big repair so your actual cash flow will be higher but you know down the line you have to pay for a roof repair New AC unit et cetera um so we scroll down here we can see that based on the way we did it our cash outlay will be 48 480 so that's the 16 000 for your down payment you have another 1 680 for your closing costs 30 000 or so for the improvements I said we're gonna make so yes you're in it for 48 000 your mortgage payment every month is 424 dollars you can see here how I break down the different revenue streams you get your rental income you have a small vacancy rate so your net income is this and then with property taxes you subtract that much Insurance Property Management maintenance and repairs your total expenses this much every single month so your net operating income is this much but of course you have a mortgage to pay so mortgage reduces it by that much and then your next cash flow is this much now what I also like to do is like to see what happens in the future too so this is year One what happens in year two right year two your rents go up a little bit more you're expensive go up a little bit more as well and the numbers change here and cool thing is I also add this graph here too you can see here that over time your cash on cash return does increase but what's this what's this blue one Total return you know this is pretty high here almost 15 well the beauty of it is your net profit from real estate investing isn't just the cash flow you get it's also the equity you have in your property and you get Equity by paying down your mortgage and by the natural appreciation of the property growing up in value so you can see here you actually do increase a lot in value over time it's your total Roi even though your cash on cash Roi is only 7.16 percent which total Roi is almost 14 which is much better than the stock market now this is why buying real estate can be better than investing in stocks because of Leverage you know because of the different factors that go into the net profit and the totally generational wealth you get plus you get tax benefits and all this other good stuff of course there are many factors that go into finding a good deal in the first place you know first of all this deal was on the MLS which means that thousands of people are potentially seeing this property if you want to find great deals you probably need to look off market now the second thing to consider are finding out the actual rent in the area what I did was my best estimate but you won't actually know until you actually call a property manager who knows that local market really really well they'll be able to tell you you know based on your square footage bedroom bathroom size and location what a property will actually run for so then you can go back adjust your spreadsheet and double check on the numbers there now if you remember back in the beginning of the video I said I'd give you guys a special bonus if you made to the end well if you guys are too lazy to make your own spreadsheet to analyze your own deals then you can get a copy of mine for 50 off with a coupon and Link down below so conclusion being able to properly analyze a property is very important because if you buy a bad deal it's very hard to recover and the worst part is it might discourage you from buying more real estate in the future whereas if you start with getting good deals from very beginning it'll encourage you to buy more and more and your net worth will surely explode now if you guys want to learn more about how to invest in real estate then I highly encourage you guys to attend one of our free master classes on how to buy rental properties we go over everything from the very beginning and it's all for free and you can register for the master class the link down below as well now if you want to see another case study of some of our own properties in our portfolio you can check out this video here about how much I make on my fourplex in Florida thanks for watching guys I'll see you next time take care

Channel: Sean Pan

Views: 43,696

Keywords: real estate investing strategies, real estate investing 2023, how to analyze a deal, how to analyze a rental property, real estate investing 101, how to invest in real estate, real estate investing for beginners, investment property, investing in real estate, rental property investing, rental properties, how to buy a rental property, how to buy your first rental property, buy a rental property, buy your first rental property, first rental property, financial freedom

Id: zJn5c2qladY

Length: 12min 1sec (721 seconds)

Published: Tue Mar 14 2023