How To Invest In Real Estate: The ULTIMATE Guide to Calculating Cashflow (EASY)

what's up you guys it's Graham here so I realize that this video is very very very long overdue because I've been making three YouTube videos every single week for over two years and I've yet to make a video about how to analyze the cash flow of a rental property that's not cool and that needs to change today this is really meant to be your go-to video to show you exactly how to calculate the cash flow Wenzel property to make sure it's even profitable and this is also what I look for anytime I invest in real estate and by the way this is probably the most important step anytime you're looking at investing in real estate it's this one simple calculation that tells you everything you need to know about the property and also I just want to say a huge shout out to Brandon over at BiggerPockets I saw his video on how he calculates the cash flow of a rental property and that gave me the inspiration to make this video and give my own take on it so I will go ahead and link to his video in the description for anyone else who wants to check that out so go ahead sit back relax make yourself comfy smash that like button subscribe if you're not subscribed already and let's get into the video so let's go ahead and start from the very beginning the first step you need to do anytime you're calculating the cash flow of a rental property is to calculate what's called the gross income gross basically just means the total income of a property before any expenses now when you have gross income there's typically two types of gross income you're going to be looking at anytime you're looking at a property online the first is what's called the actual income the second is what's called projected income actual income is just how much the property is currently making right now with actual rents now typically when you see actual income this just means that the building is currently being rented out and this is the actual amount of rent that the owner is receiving from all of the units now that is the type of information that we want to see as a real estate investor but wait a second because then we have that second type and that is projected income this is something you're probably going to be seeing all the time if you're looking at properties online this is basically just the projected amount of rent they think they can get if the unit becomes vacant and you rent it at current market rates they're pretty much just telling you that this is how much I think this unit would rent for if our current tenant moves out and you go and get a brand new tenant in there this is how much that unit we think is actually worth now when it comes to me I always just ignore projected income whatever they tell me the unit's worth whatever they tell me they can get for it I just ignore it now the reason for this is because you actually need to do your own calculations to determine what the unit can actually rent for and not listen to the owner because I'll tell you most of the time the owners that tell you projected incomes are being very optimistic and very generous about what their unit is actually worth so don't ever really believe what they tell you here it's just a very rough estimate so just move on so with that said I'm gonna put up some really fancy Photoshop stuff here that took me forever to do so if you wouldn't mind just hitting the like button because this took me hours to do that that's it that would make my day that'll make all this editing worthwhile which is the like so thank you very much let's go to the fancy photo shop here on the screen now so let's just say we have a building selling for three hundred and sixty thousand dollars that has three units and each unit is being rented for one thousand dollars this means that the gross rents that the building is getting is three thousand dollars per month or $36,000 per year now in addition to the rents it's also very important to identify any other income sources that that property might be generated for example some properties might have laundry income other properties might charge for storage and they have storage income other properties might have parking income so if that's the case just add any of that additional income on top of what the property is receiving in rent for this example let's just assume that the owner is not gouging the tenants for additional services and all of that is included in the rent because the owner is a nice guy so let's just assume for this that all of those are going to be zero okay so there we go now we have the gross income we're almost done not really but we finished the first step now we just need to get to our second step and that is expenses see anytime you buy a property you're going to have what's called fixed expenses this means that these are expenses you're going to have no matter what even if you bought the property in cash you have no mortgage you're going to have these expenses that's why I call them fixed expenses these expenses include property tax and there's no way around that one as far as I'm concerned then we have insurance you should probably have insurance then you might have the cost of a homeowner's association which I don't like HOAs then you might also have utility charges if you're responsible for paying some of those for the tenant in which case they better be saving that water then you'll probably also have normal upkeep like a gardener maybe some pest control or anything else like this then you'll also have the inevitable repairs that will eventually need to be done at some point or another and you'll also have management fees if you decide to get a property manager and then finally you're gonna be having some vacancy which is when a tenant moves out the unit's not being rented and you're losing out on some income so now let's fill in some of these examples for our building let's just say the property taxes are going to be three hundred and sixty dollars every month insurance is going to be another one hundred and fifty dollars a month let's just assume that there's an HOA and that's gonna be $50 a month we'll assume that the tenants pay all of the utilities so that is zero dollars a month you also pay $50 a month for the gardener because the HOA is too cheap to afford one then let's say the repairs are about a hundred dollars a month because your tenants are a little bit clumsy then you'll pay an additional two hundred dollars a month in property management because ain't nobody got time for that and then finally we'll throw in the additional $100 per month for the average vacancy just as an example that brings our total fixed expenses to one thousand and ten dollars every single month this means that even if you own the property outright you bought it cash you have no mortgage your straight ball and hard you're still gonna have the fixed one thousand ten dollars per month in expenses no matter what unless of course you decide not to pay your property taxes or pay your insurance or do any repairs don't do that so anyway now we calculated our gross income we calculated our fixed expenses now it's time to figure out what our net rental income is going to be and the net rental income is basically calculated by taking the gross income subtracting our fixed expenses and there we have our net rental income so in this example we take our three thousand dollar-a-month gross rent minus one thousand ten dollars per month in fixed expenses and that brings us to nineteen hundred and ninety dollars per month in net rental income and if you ended up buying this property cash out rights you don't have any sort of mortgage well there you go there is your cash flow you paid three hundred and sixty thousand dollars for a property that makes twenty three thousand eight hundred and eighty dollars per year and that means you're getting a six point six three percent return on your money now how did I calculate that all you need to do is divide the net rental income by the price you paid for the property and then multiply that number by a hundred and then what you have left over is your percentage return this is also what's referred to as the cap rate of a property but it doesn't stop there because if you're a smart real estate investor you know that it's better to get a mortgage and leverage your money to get an even higher return so I'll explain how you can actually get this property to pay you more than a ten percent total return on your money just by getting a mortgage so in our example here I'm assuming that you're putting twenty percent is a down payment on the property and then you're financing the rest and a five percent interest rate over 30 years now want to calculate this I use a website called mortgage calculator comm and you basically just plug in all the numbers and it gives you whatever the results are so I'll just put the screen share of the website here and we'll do this right now so first of all we got a three hundred and sixty thousand dollar home value we'll put a 20% down payment here we'll assume the interest rate is five percent that's for a 30-year loan and then we'll leave the rest of this all blank then we hit the little calculate button and that gives us a total payment of one thousand five hundred and forty six dollars per month so now what we end up doing is we take our net rental income after all the expenses of 1990 dollars subtract our mortgage payments of one thousand five hundred and forty six dollars and that gives us leftover four hundred and forty four dollars every single month after making the mortgage payment now here's how we calculate your return because remember you put $72,000 as a down payment to buy this property well the thing is anytime you buy a property it's never just the down payment when you buy it there's always closing costs associated with that property so let's just assume that the closing costs on the property are going to be equal to one percent of the purchase price and that would be $3,600 as our closing costs this means your total investment at the property is your $72,000 down payment plus your $3,600 in closing costs and that brings the total investment to seventy five thousand six hundred dollars there we go math for the wind so that means you invested seventy five thousand six hundred dollars to make a monthly net return of four hundred and forty four dollars every single month and that also works out to be five thousand three hundred and twenty-eight dollars every single year now we do basically the same calculation that we did before we take our net rental income of fifty three hundred twenty-eight dollars we divide that by our total investment to buy the property which is seventy five thousand six hundred dollars multiply that number by a hundred and there we go that gives you a total return of just over seven percent on your money took me a few times to say that I can't believe I memorized that I don't use a teleprompter for any of this i memorize a lot of this stuff and then I just say it back to the camera so that was a win but hold on there because wait there's more gets even better because that seven percent is just your cash on cash return there is also the return on equity portion of this entire calculation because remember that every single month that you pay your mortgage part of that payment is the interest that you owe on the balance of your loan the other part is the equity the amount of principal you are paying down every single month so every month that goes by that you're paying a mortgage is one month closer to you owning 100% of that property so in order to calculate how much equity you're actually paying down let's go back to our website mortgage calculator org and by the way this is not sponsored by them I wish they were sponsoring this video because I need some lambo money but anyway it's just a website I really like and basically this is the website that I use myself so anyway once you input all of your numbers you're going to go to underneath where it says calculate where it says see amortization schedule then you're going to click show annual amortization and then hit calculate and also hit that like button and there we go we can see that in the first year you pay down your total loan balance by four thousand two hundred and forty nine dollars and remember this is straight-up equity in the property so I absolutely count this as income as part of your total return so now we go back into the lovely chart here that took me forever to do so now we take our four thousand two hundred and forty nine dollars in equity the first year by paying down the mortgage then we add in addition to that the five thousand three hundred and twenty eight dollars cash return that you get from your rents again after all the expenses and after paying the mortgage and that brings the total ROI on this property to nine thousand five hundred and seventy seven dollars in the first year and then of course if we do the normal calculation take that number divide it by seventy five thousand six hundred multiplied by a hundred and again that gives us a twelve point six percent return just the first year that's basically a very steady predictable guaranteed twelve point six percent return this is why I absolutely love real estate and with this entire formula you can pretty much just go and plug in your own numbers and that is going to give you the expected return of the property I also use this calculation to determine how much a property is actually worth for example I can compare the expected return of one property against everything else that's selling on the market and then based off that I can tell whether or not it's priced in line of everything else or if it's overpriced or if it's actually under priced I also use this calculation to determine how much I'm going to be making from my investments especially when you begin renovating properties raising rents and adding value to the properties this is where these rent numbers really take off and if you're ever thinking about getting in and investing in real estate this is the most important thing that you will need to know how to do and just for practice I recommend that you go online check out a few properties figure out approximately how much you think they would rent for and then plug in your own numbers and if you do this example and if you plug in your own examples here ten times I guarantee that after ten times you will fully understand you'll fully know how to do this and this is going to help make you a ton of money in the future so with that said you guys thank you so much for watching I really really appreciate it again if you enjoy videos like this and you're not already subscribed make sure to smash that subscribe button smash that notification bell and also again if you really appreciate videos like this just go ahead and add me on Instagram I post it pretty much daily so if you want to be a part of it there feel free to add me there and finally and also I have a private Facebook group in the description for anyone who's interested in real estate real estate investing real estate agent saying real estate wholesaling real estates in anything real estate the link to that is in the description feel free to add yourself to that I think we have to narrow like 13,000 members in that group which is awesome so it's such a cool community so anyway add yourself to that thank you again for watching and until next time

Channel: Graham Stephan

Views: 407,769

Keywords: How to invest in real estate, how to calculate rental income, how to analyze rental income, how to calculate cashflow, rental property cashflow, how to analyze cashflow, biggerpockets, calculating numbers on a rental property, how i analyze a rental property, real estate investing for beginners, real estate investing strategies, how to make passive income, passive income, passive income ideas, investing in real estate, real estate investing with no money, passive income 101

Id: DgWcrsavcJs

Length: 13min 55sec (835 seconds)

Published: Wed Jan 30 2019