In this tutorial video, we will show you how to use the Rental Property
Calculator available at Hauseit.com. If you're not already on the calculator
page, you can get here by visiting Hauseit.com. The spelling is at the top and
once you're here click on calculators and go to the buy tab as you go down on
the right side, you will see Rental Property Calculator. There's also a
number of other calculators as well if you're buying a rental property you
might be interested in your buyer closing costs as well that's critical as
you figure out what your return profile will look like and it may also be
helpful for you to look at the Mansion Tax Calculator if you're buying
something above a million. As well as the Mortgage Recording Tax Calculator if you
are financing your purchase final note as well the purchase CEMA Calculator is
pretty interesting. There is an opportunity for you to save some money
and reduce the mortgage recording tax if the property has an existing loan on the
sellers side and you're able to persuade the seller to assign some of that
mortgage to you and that would reduce the amount of new mortgage your
underwriting and therefore, it would help you save some money on your closing
costs. So going back to the Rental Property Calculator, the ultimate purpose
of this calculator and the exercise is to help you compute a couple of metrics
for investment properties that will help you analyze one particular investment
against another. In particular, we are interested in the cap rate because the
cap rate is a very common metric used to compare and contrast different real
estate investments across cities across neighborhoods and across specific
opportunities and it's also interesting to figure out your annual cash flow as
well as possibly your cash on cash return.So if we were to take just a
hypothetical example, let's start with the purchase price say of 1 million two
hundred and fifty thousand dollars for a closing cost estimate customarily
for a condominium or for a house. Assuming you're financing your your
buyer closing costs at least in New York City are going to be around 4% so we
could either quickly just use the buyer closing cost calculator to compute those
or we could just take an Excel spreadsheet. But in this case, let's
quickly digress and go to the buyer closing cost calculator. Let's assume
again we have a sale price of 1.25 million and let's say we are financing
50% so in that case we'd need to get 50% of 1,250,000 which is six hundred and
twenty five thousand. Well choose condo here and as you can see here the total
closing costs are about 40k. Now they're lower than the four percent we mentioned
because we're actually financing a relatively small amount of the purchase
price. If we were to finance say 80 percent which is more common, you would
see that the closing costs have gone up and they'll continue to go up. The more
that you finance the reason for that is the mortgage recording tax obviously
only applies to the amount of loan that you need. So if you have a smaller loan
you're paying a much smaller mortgage recording tax so let us take that
$40,000 number for closing costs. We'll put that in the rental property
calculator and then we would probably want to figure some sort of monthly
rental income. You know if you're buying a condominium like this in lower
Manhattan it's probably a very small two-bedroom if that it's probably more
likely to be a one-bedroom apartment so you know we could take a monthly rental
income say of 5500 hypothetically and for our interest rate put something like
five percent now our next step would be to input a mortgage loan amount. So if we
were to finance half of the purchase we would therefore have a loan
of six hundred and twenty five thousand dollars as far as property taxes and
common charges are concerned. We can go ahead and just estimate and say that
each one is seven hundred and fifty dollars a month. Now these are annual
fields so in order to calculate the annual property taxes and common charges
we would just multiply 12 by 750 giving us nine thousand a year. So we would put
nine thousand under property taxes as well as nine thousand under common
charges. As you can see here, we've already calculated a preliminary cap
rate cash flow and cash on cash return a couple of the things that we do want to
think about in no particular order. The vacancy rate is important because up to
this point our entire calculation has assumed that during the course of a
normal year, there would never be any vacancy and even in a city like New York
where you have limited housing stock and very strong demand. It is possible from
time to time maybe every year or every other year you have a few weeks or a
month or month and a half or two months of vacancy that being said for this
example we can possibly assume that an apartment is going to be vacant for one
month out of every 12. Ideally, it's much lower than that in New York City but
let's consider this a semi conservative assumption so one month out of 12 is
8.33% so if we were to go back into calculator
and we were to input an 8% vacancy rate that would give us some degree of
cushion for the possibility of our investment being vacant. Now as far as
property management fee is concerned, this is definitely something optional so
if you are in your city where you're investing and you want to be semi active
or fully active you probably don't need a property manager so you could put zero
here. But if you're out of state you need somebody to take care of things for you
to let in the plumber, let in the super things like that deal with the tenant
may want to budget something for a property management fee. So we could put
in a very low estimate possibly 5% per year that would be 5% of your monthly
rental income that you would pay the property manager. So at this point we've
essentially filled in everything here with the exception of homeowner
insurance maintenance as well as the the cost of any renovation for your typical
apartment a homeowner's insurance premium is going to be a thousand to two
thousand dollars a year the same would be the case for a so for homeowners
insurance premium let's put in $1,000 and keep in mind it could be a little
higher if you're buying a mixed use property multi-family a more expensive
home town house or apartment. You can find out an estimate a more accurate
estimate by using an online quote generator. There's a ton of them out
there feel free to take a look so if we add the homeowner's insurance premium it
is gonna further lower our return related metrics because it is another
cost that we do have to incur now as far as maintenance and repairs you certainly
do want to input something here because it is unrealistic to have a real estate
investment that doesn't require upkeep over time so we've put 5,000 which may
be a little high for a property like this, But if you annualize or basically
prorate large capital projects over time such as replacing your windows replacing
the HVAC unit, it may very well be the case that you pay about 5k a year for a
property that's just over a million. Finally if we want to include a cost of
renovation in this investment, we can go ahead and do so and as you can see
adding something to renovation costs will lower the cap rate and it will
depress many of our metrics so our cap rate is currently two point five nine
percent. If we do a $50,000 renovation, our cap rate goes down to two point four
nine percent so a little bit about cap rates. This cap right here is relatively
low although in New York City where cap rates are low in general it's not the
end of the world. If you are in another city a less vibrant city economically
speaking this cap rate would be almost a joke. It would be way too low
for it for it to be worthwhile so in New York City cap rates on the higher end
are going to be maximum three and a half four percent for your typical apartment
residential apartment. In the city, you certainly can't get higher if you if
you go into further out neighborhoods bed-stuy Crown Heights might be a nice
hybrid between the low-risk type investment qualities of something in
Manhattan plus a little bit of upside. If you were to go into further out into
Queens the Bronx you certainly can't find a higher cap rate but in theory it
is proportionate with the increased risk and possible higher vacancies and other
additional risks associated with being in an area that is essentially less
economically vibrant that being said. You can play around with the calculator to
see if your investment is worthwhile and you could also compare investment one
against investment two using these various metrics as your variables so if
we were to say for example instead of this property which gave us two and a
half percent cap rate we did a purchase that was eight hundred thousand and
somehow the monthly rental was only a little bit less. Let's say it was 4900
and let's say that this property was already renovated and our closing costs
were lower let's say our closing costs were only twenty thousand and again we
can just double check here what they might be assuming we're financing 50%
it looks like our closing costs are going to be 20k so in here we would put
20k for the closing costs and we would also want to lower the mortgage loan
amount to our new figure of 400. We probably want to lower the property
taxes because it's a smaller property less expensive same goes with the common
charges HOA premium we can keep the same and maybe the maintenance and repairs we
lower it to 3500. So in this case, as you can see we've actually come up with a
much higher cap rate this would actually be a very good investment in especially
in Manhattan. This would be a very appealing opportunity relative to what's
out there in the city but just to re-emphasize, if you were in another city
Detroit for example. If you're in Detroit a cap rate should be probably double
this at a minimum to make it worth your time. If you have any questions, leave us
a comment below the video and don't forget to check out the Buyer Closing
Cost Calculator as well as a number of other calculators here that might be of
interest. If you're still renting your primary home, you can also compute net
effective rent which helps you understand the relative attractiveness
of any landlord incentives such as a free month and contextualize it based on
the advertised rent amounts. Let us know if you have any questions again leave us
a comment send us an email give us a call we'd love to hear from you