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in Real Estate Investing, Series: Getting Started in Real Estate · September 15, 2021

How to Analyze Rental Property Investments

In evaluating rental properties, it is important to account for unknowns and other operating costs. A lot of new investors optimistically evaluate properties and do not consider all potential costs. Once they realize what it costs to own and maintain the property, they may end up realizing that the numbers don’t work.

Two important questions:

  • How much would it rent for?
    • You can answer this question by looking at comparable rentals in the area of the property you are analyzing. Rentometer.com is a good source or even just looking in Zillow for rentals in the area. Your realtor can also provide you rental comparison analysis for your area of interest. The DealCheck app I mention at the of this post is also great resource for this.
  • How much would it cost to maintain?
    • This is key in determining whether a property is a good deal or not. Below I provide a guide of expenses to keep in mind when doing your property analysis.

Common Rental Property Expenses:

Real Estate Taxes – Look at the property appraiser website or even websites like Zillow, Redfin or Realtor.com have records of what the taxes are. Keep in mind that if the property is owned by an owner-occupant, they might have tax breaks due to homestead exceptions. These are not available to investors; therefore, you need to true-up your number.

In order to get a better feel for the property taxes in the area, look at the real estate taxes for a few properties and then make an estimate. Even if the property was a rental property before, you still want to account for an increase. Property taxes go up every year and are expected to go up if the purchase price of the property is significantly higher than the last sale price.

Insurance – Real Protect will give you a free quote estimate for insurance. You can also ask around to see what insurance costs would be for a house of the same size in the city. This is an investor friendly insurance broker that we use for all of our properties. This company has saved us thousands of dollars when compared to the standard customer insurance brokers. Websites like realtor.com and zillow.com also provide estimates, but they are not as accurate.

Capital Expenditures (CapEx) – At some point, you will be required to replace the A/C, the roof, etc. This is an amount that you keep as a reserve in the event of any unknown big repairs. The rule of thumb applies here. Generally, estimate to reserve 5%-10% of rental income.

Maintenance & Repairs (M&R) – As a landlord, you are responsible for maintaining the property in habitable conditions. While you can push some cost to the tenants (if you have proper lease clauses), there are some maintenance items that remain your responsibility as a landlord. For example, sewage line issues, A/C maintenance, appliance repair, etc. There are some things you can’t trust your tenants to do. You may end up paying double the cost down the road with mediocre repairs.

Rule of Thumb also applies here. Generally, we estimate that M&R cost will be 5-10% of rental income.

Landscaping – A lot of times this expense is overlooked. If you have a duplex or multi-family this will likely be your responsibility. Unless you have fenced in yard, it is hard to allocate shared yard space with individual tenants. If a single-family property, then the lease can be drafted to shift responsibility to the tenant and can be excluded from your property analysis.

Utilities – Make sure you know what utilities are the landlord’s responsibility. In a multi-unit property, if there is a shared water meter, it will be the landlord’s responsibility and it should be included in the analysis. If you are familiar with what the costs are, you can estimate a ballpark or you may want to ask around (either the owner/realtor or anyone familiar with the city where the property is located).

Management Fees – This is discretionary, but I always recommend analyzing the properties with a management fee even if you plan to self-manage. What if you realize that you don’t want to be managing and then the property can’t afford it? This varies by city/state, but generally between 8-12%. Talk to management companies in the area to get an idea of what the cost is in your market.

HOA – Double check to make sure if there are HOA or Condo Association fees and how much.

In addition to the above, you need to consider loan costs like Principal and Interest payments. If you have a loan, you need to add Principal and Interest into account.

Vacancy costs – this is one expense commonly overlooked, but important to take into account. In an ideal world, you have long-term tenants and minimal tenant turnover, but this is likely not the case. You need to account for the loss of rent incurred when a tenant moves out and you have to get the property ready for the next tenant. Normally, you would want to reserve for one month’s rent. We use the highest of 10% or one month’s rent.

In large multi-family projects, analysis may require more detailed analysis, but for small multi-family and single-family, you should be okay by taking into consideration the above items when doing your analysis.

At the end, you should end up with positive Cashflow and that number should be in align with your investment criteria. If you haven’t setup your investment criteria and strategy yet, be sure to checkout my blog post on how to do this here.

Personally, our analysis criteria looks like this. The ratios below are a percentage of the monthly rental rate.

  • 10% vacancy rate
  • 10% maintenance & repairs
  • 5% capital expenditure (if rent is too low, we adjust to 10%)
  • 10% management fee
  • Plus estimate of real estate tax, insurance and mortgage costs

Whenever we are looking into a market we are not familiar with, we may increase the percentages above to be conservative.

Other Metrics to Consider

There are few rules of thumb created to help investors perform quick analysis of rental properties. These are not one-size fits all. You should consider all of the facts around the property prior to making a decision based on the metrics below. We’ve bought a few properties that don’t meet the rules below and they are still great investments.

The 1% rule – The price that the property can rent for should be at least 1% of the purchase price. Therefore, in a perfect world, a property valued at $100,000 should rent at least at $1,000 per month. The higher the percentage of rent over income, the better. Keep in mind that this is just a guide. You still want to run all of the numbers to make sure. In some markets like South Florida, California, New York, you are unlikely to find any property that meets the 1% rule, but that doesn’t mean they are bad investments. A lot of times the increase on the price appreciation is much better.

The 40% or 50% rule for operating expenses—This rule is that the operating expenses of a property should not be more than 40% or 50% of the rental income of the property. Again, this is just a rule of thumb. You should still run the numbers in the full scenario.

Cash-on-Cash – The cash on cash is the return you want on your money. Annual Cash Flow/Property Cost The higher the cash on cash % the higher the return. Ideally, you want a balance of cash flow and cash on cash. Basically, the least money you leave in a deal, the higher your returns because your income is growing without much investment. We personally aim for no less than 6% cash on cash, but it’s not a set guideline.

Return on Investment (ROI): It is similar to the cash-on-cash return calculation, except that it takes into account the mortgage paydown of the property. Annual Return (Cashflow + Loan Paydown)/Property Cost. A return on investment of 15-20% is good, but again, should not be the only factor to consider.

Real estate plays a key role in our plan for early retirement. Cashflow is what matters to us. We still analyze all of the metrics when making our decision to buy, but the one providing the highest cash after paying for all expenses is the one we go for. We usually aim for $200-$300 a month.

A tool that has really helped us to step-up our property analysis game is Deal Check. It’s a phone app and all you have to do is copy and paste the address of the property and it will bring up all of the property facts and even provide you with estimated market value of the property and market rents. You can then play with the numbers and it will give you all of the metrics I noted above. Another cool of thing is that you can set your pre-determined requirements and it will immediately tell you whether it meets your criteria or not. It will also calculate the purchase price needed to meet your investing criteria.

We have the pro- version which is the one that includes an automated feed from online sources and it’s only $16 per month.

If you use my link and code you can get a 30% discount. Check it out here: DealCheck/Beyondjustnumbers, enter my promo code: BESTDEAL for the discount.

In the next post of the “Real Estate Investing” series, I will be doing a real example of our analysis process. If you want to be notified of my next post, be sure to subscribe to blog notifications in the subscribe box below.

Thank you for reading and I appreciate your continuing support. Let me know if you found this helpful by clicking the ❤️ button or leaving a comment below. Feel free to ask questions or provide feedback for future blog posts.

Until next time!

This post may contain affiliate links. I may get commissions for purchases made through links in this blog.

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New Blog Post 🚨 In this week’s blog post I am New Blog Post 🚨 In this week’s blog post I am going over why we bought a short-term rental, our experience so far. Plus what we did prior, during and after purchasing our first short-term rental in March 2022, a Cabin in Blue Ridge, GA.

Check it out at www.beyondjustnumbers.com or link in bio @beyondjustnumbers
I can’t stress this enough. Some investors are l I can’t stress this enough. Some investors are looking to make money from day one, but that’s not always the case. It wasn’t for us and I’ve talked to a lot of rookie investors who have told me “Thank God I have my personal finance situation together.” 

This is just my opinion. Do you agree? Let me know in the comments!

Want to join a free community of like-minded individuals? Join our REI Coffee Chat Community where we talk real estate investing, personal finance and financial freedom, and much more! Link in bio @beyondjustnumbers

Want to learn more about investing in real estate? Read my blog www.beyondjustnumbers.com

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I used to think that investing in real estate was I used to think that investing in real estate was for the rich. I became in love with real estate while working for a real estate investment company that owned hundreds of units. This was back in 2011 and I was 20 years old at the time. I had less than 5 years permanently living the US, so I had no idea about anything. I grew up in Colombia and the only talk of money we ever had was the lack of it. 

The investors I worked for were a wealthy family, so naturally, I thought… Real Estate requires wealth. I don’t have wealth. Therefore, I cannot invest. 

I figured… well shit, I need become wealthy so I can invest in real estate. Eventually, after educating myself I realized how wrong I had it. You can build wealth BY INVESTING in real estate.

Took me a couple of years to figure it all out. Hence, why I didn’t start investing until 2019. I wish I had figured out earlier, but it is what it is. In just 3 years of investing in real estate, I was able to accumulate more wealth than I ever thought possible. 

Just to give you an idea…Did you know you could invest in real estate with as little at 3.5% of the purchase price? For a $150,000, that’s only $5,750. Buy a duplex that needs a little bit of work, fix it up, rent one side and live in the other. This will reduce your monthly expenses significantly, save the money and do it all over again.*

Of course it’s not that simple, but it’s also not that difficult. There are some particular steps and considerations which is  why I recommend doing further reading on the subject. 

Book Recommendation:
✅“The House Hacking Strategy” by Craig Curelop and ✅“Investing in Real Estate with No (and Low) Money Down” by Brandon Turner. 

#realestate #realestateinvesting
🚨 New Blog Post! Continuing the “Getting Star 🚨 New Blog Post! Continuing the “Getting Started in Real Estate Series” 

You’ve found a property either on your own or through a realtor, you’ve run your numbers, you’ve got a lender and now you are ready to make an offer. What’s next?

In this post I want to discuss a few items:

✅Key components of a real estate contract
✅How do you make a compelling offer to ensure you get the property you want
✅The main contract contingencies and how they work
✅Communicating with your realtor

I also provide real examples of what we have done personally. 

Check it out at www.beyondjustnumbers.com

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If I listed all of the hats, I’d never end 😂. If I listed all of the hats, I’d never end 😂. Anyone else? Show me the multiple hats you wear and tag me. Let’s have fun with some reels.

Trying to get good at the real game like @investinginyourwealth. How did I do?
The fact that you are not where you want to be doe The fact that you are not where you want to be doesn’t mean you won’t get there. Greatness takes time. Focus on what you control.

And remember, it’s okay to pivot.

#mindset #realestate #firemovement #realestateinvesting #realestateinvestor #rentalpropertyinvestor #rentalproperty #cashflow #motivation #financialfreedom #financialindependence #financialindependenceretireearly
We see a lot of advice around hiring a real estate We see a lot of advice around hiring a real estate friendly CPA. However, when you look up  CPAs that specialize in real estate, they can be pricey.  However, that doesn’t mean that other CPAs or tax professionals aren’t good. They might not be particularly aware of certain items, but they can research and collaborate with theirs peers. Perhaps it may require you to do a little of work to compensate. Things you can do:
✅ listen to The Real Estate CPA podcast or join the Facebook group
✅follow social media accounts of the pricey Real Estate CPA and take notes of what they are saying
✅attend free educational events 
✅read BiggerPocket book on Real Estate taxes 
✅if you know anyone working with a really good Real Estate CPA firm, ask them what they are doing

Then use that to go your CPA or tax professional and be like “Hey, is this something we can do for me?” They’ll probably say, “Let me look into it”. 

If they are good, they are going to research it and/or ask their CPA peer group. (CPAs and tax preparers also have Facebook groups where they collaborate with each other).

Here is a piece of advice, if they tell you “No, we can’t use this loophole or no, you don’t qualify to use this strategy” —> Ask WHY and “How can I qualify in the future?.” This way you confirm they did their homework and aren’t just being lazy. Don’t just take no for an answer. You can then get a second opinion by asking a question in a forum or to your peers.

So don’t panic if you don’t have a real estate CPA or tax professional. 

Next video I’ll be answering the question… “Can I skip the tax professional altogether and do my own taxes?”

#realestate
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