A lot of you are typing in how to calculate return on real estate investment. My favorite thing to do
when looking at a deal is to evaluate it properly because that's where all of my revenue lives.
If you calculate a deal incorrectly, it'll cost you thousands and thousands of dollars later. In
fact, evaluating deals incorrectly is the number 1 thing that kills deals after you buy them.
In this video, I'm going to walk you through the 5 things you need to know to calculate
your return on investment in a real estate deal. Before you do that, you have to understand how
it's at play and then the ultimate formula for really deciding that return because we don't buy
real estate emotionally, we buy it on data. Meaning the numbers tell us if it's a good investment. And
stick around to the end because I have a free gift I want to give you that'll help you completely
revolutionize your real estate portfolio. The first thing you want to know when evaluating the deal is
what market you're buying in. This is a big thing a lot of people don't play in to their evaluation
process. They look at the numbers and they look how it looks on paper, but they don't think about
the market. This can actually be the number one thing that makes you money and here's why. You buy
a property in Iowa where nobody lives and there's corn fields everywhere, you're going to appreciate
a tad slower than if you buy it in Atlanta, one of the fastest growing cities in the country
because jobs dictate real estate growth. Underline that one because let me tell you, it'll make you
more money than any other truth. Your market will dictate your growth of value and the growth of
value is where the majority of our profit lives in real estate. Yes, we love cash-flow but appreciation
will always make you more money. In fact, we say it this way. A lot of people see cashflow as cake and
appreciation is icing, that's the wrong way to look at it. Appreciation is our cake, cashflow is icing
because you'll always make more appreciation than you will cashflow. What drives appreciation?
Right here, the market. Yes, we can increase the value by increasing our income but you can only do
that so much if the market is declining. So, before I buy a property, one of the things I look at is I
go to Google and I see where the population is at. Is the population growing or are we seeing a
dying city? Somebody texts me a while back asking if I would invest in Cleveland, Ohio, the answer? No,
because it's been a declining city for many many years. Now, if somebody asked me will you invest in
Columbus, Ohio? Absolutely because Columbus hasn't dropped in population in over 20 years. It has
been a consistent growth track. Would I invest in Indianapolis? Absolutely. Last year, Indianapolis
had the strongest rent growth of any city in the country. The thing is the market dictates value and
if you want to see your ROI skyrocket, make sure you're buying in a market that'll let that happen.
But then the 2nd thing when you're evaluating a deal, you obviously have to look at the financials,
that's kind of a no-brainer in the investment world. We have to see where the financials are
so we have to look at our income and expenses and see what our NOI is. NOI is simply income
minus expenses equals your NOI. So, if you do income minus expenses, you're going to equal
your NOI or your net operating income. The bank and appraisers will dictate the value of the building
off of your net operating income. So, in commercial real estate for example, if you're increasing
your NOI, you actually increase the value of the building. You increase the value of the building
when this number goes up. So, when you're looking at a property, "Should I buy this, should I not?"
Is there room to take the income up? If the income is already at the top of the market, there's really
nowhere to go, might want to look for a different property. Income minus expenses is your NOI. We
need to know that number in order to calculate our return on investment, you'll see why later.
And then of course the 3rd thing you need to know is your cash needed. This is how much money
is it going to take to get this deal to the finish line, and here's what comes into play
when you're thinking about your cash needed. Number 1, you have your DP or your down payment.
This is by far your biggest expense of any real estate deal. You need to make sure you can cover
the down payment and usually that's anywhere from 25 to 40% of the asking price. And
that range is dictated on the value of the property and the stability of the property.
If it's bleeding cash and it's not really making any money, they're gonna want you to put more money
down. If it's a really good stabilized property and it's making good money, they're willing to take a
little bit more risk and put in 3 quarters of the investment. So, the first thing you have is
your down payment then you have an appraisal. So, you have to go and get an appraisal. Appraisal is
going to cost anywhere from 2 to $7,000 depending on the project and what kind of
appraisal you're getting. So, you're gonna need to cover the appraisal in order to get that deal done.
You're also going to have to cover an inspection cost for every property
forever to get an inspection, and here's why I make such a big deal about inspections. Number
1 when you pay an inspector, their job is to find something wrong with the property. They feel like
if they hand you an inspection report and they don't tell you anything, that they really haven't
done their job so they're going to find something. You take that inspection report back to the seller
and you say, "Listen. Here's the thing that need to be fixed. Would you please either fix these
or decrease the cost of the property?" And this often, almost every single time you'll get your
cost of inspection back in either a decreased price or the owner doing some work for you.
We recently bought a building and we got an inspection on it. The roof was a little iffy,
we asked for $20,000 off ,they ended up taking $10,000 off but it
was an $18,000 inspection that's almost 5x our investment of an inspection
by getting that inspector to look at the entire property and it brought our cost down $10,000,
that's the value of an inspection. I know it costs money but I'll encourage everybody to
get an inspection. Even if you're a contractor, I would still get a third party inspection because
you have bias in the property and the seller may not be as apt to work with your inspection of the
property but a third party who has no bias in the deal, they're often seen as more truthful and more
honest in the inspection. And then the 4th thing you're going to do is the closing cost. The closing
costs are anywhere from a half to 1 and a half percent depending on the kind of bank you're using
and the kind of loan you're getting. So, make sure that you count the closing costs so you understand
where really am I at in my cash needed. So, if you write down your down payment, your
appraisal, your inspection, your closing costs, then you're gonna have the majority of the cash
needed. Now, there are some stipulations to the cash needed depending on the kind of deal you're doing
and how you're structuring it. If you're buying it with other partners, you may have some legal fees,
meaning you may have to drop a JV contract or a syndication contract. Now, if you're
drawing up a syndication contract, that can be anywhere from 7 to $15,000
so make sure you know if you're drawing up a syndication contract and a PPM or a private
placement memorandum, you need to know that that's gonna increase your cash needed to get into a deal.
And the last thing you really want to know that is only applied to really bigger buildings is if
it's a bigger building, the utility company may ask for utility deposit and the insurance company may
ask for your first year's insurance paid up front. Well, first your insurance paid up front is a lot
of money on a bigger property. It could be anywhere from 50 to $100,000 and so you want to make sure if
that truly is the case, that you prepare for that cash needed. The reason cash needed is so important
is this is what dictates our return on investment. How much money we have to put into the deal to
get it will dictate how much money we're actually going to make on it and that's why the cash needed
is such an important process to go through and figure out how much you actually need to get
into this deal. Before I go into the last 2 tips on how to figure out the ROI of any real estate
investment, make sure you subscribe to our channel and join our family of real estate investors that
are creating financial freedom through real estate investing. Also, make sure you smash that
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And the 4th thing you need to calculate is your value add. Now, your value add is how you're
going to increase that number. Value add is how we're going to increase the net operating income.
So, are we going to increase income? Are we going to decrease expenses and how is that going to happen?
Maybe you've really looked at it and the rents are 10% low and you can really raise the rents no
matter if it's a commercial piece of real estate, storage units, mobile home, parks or multi-family,
you can increase that NOI. But your value add is a direct correlation to how much we can increase the
NOI, meaning either increase the income or decrease the expenses. And so, what you want to do when
you're evaluating a property is start figuring out what your value-add is. One of the ways I do that
is you can go to a company called rentometer.com and you can check the rents in the area and kind
of see the average of the kind of property you're seeking to rent out. That'll tell you an average
and then you can dictate if you can go a little bit higher because your building's a little nicer
or you need to come down a little bit less because the part of town you're in or the kind of property
you have may not be able to yield what the market is getting. But that process will help you kind of
see the average in the area. Now, let me make sure I make a note again about the average. The average
doesn't mean that's all you can get, it just means that takes into account the entire area of both
the low rents and the higher rents and it gives you an average. I've realized the averages are
usually low for the properties I have and so we can bump that up a little bit more. So, if you have
a 1 bedroom, 1 bath, you're getting 750, you look at the market, it's getting more like 850, that's a
lot of value add. So, you can put a $100 per unit. So, if we do a $100 per unit
on a 10-unit building, that's a $1,000. So, that's $12,000 per year. So, we
just increased our NOI by $12,000 assuming we don't decrease the expenses at all.
When you're looking for a property, looking for properties that have value-add components should
be one of the number 1 things you're looking for after you pick a strong market. If you're in a
good market, that could still be okay because that market's going to continue to grow and increase
the value of your property but it's going to take longer usually. So, buying a property that has value
add components, they have low rents or they don't have any other streams of income that are possible,
then that's a value-add opportunity and we can go forward with that. And the 5th thing to evaluate
when you're looking at a property is your cash on cash return. By the way your cash on cash return
is your ROI at least while you own the property. So, cash and cash return is simply a simple formula.
NR divided by CN equals your ROI or your cash on cash return. Now, cash on cash return simply
means how much money do I make in relationship to how much money I have to put into the deal. So, let
me walk you through this formula. NR stands for net return. So, I take my income minus my expenses,
I get my NOI, this does not include my mortgage payment. So, then I minus out my mortgage payment
and I have my net return. So, all a net return is NOI minus mortgage payment. Now, I have net return.
So, here's how this net return works. So, you take your net return, that's how much you make after
all of your expenses, all of your mortgage payment, it's how much you have left every single month
after everything is paid, that's your net return. And then you divide that between your CN
or your cash needed. So, let's say you need to put a $100,00 into a deal to get that
deal done. So, we have a $100,000 is our cash needed and let's say we make 9
thousand dollars a year in net return. Well, if I do this and I go 9,000 divided by a 100
thousand, I'm going to get a 9% cash on cash return while I own the property. And what
this does is helps you number 1, speak to your investors educatedly if you're raising money or
if you're doing this project yourself, you'll begin to know I'm starting off making 9% on my
money. It's gonna be more than the stock market but it's not a massive return so then you can decide
is this a big enough return to get me into this property and that's a personal decision.
But this is how you calculate it after you know your NOI. You take out your mortgage payment, you
have your net return, you take your net return and you divide it between your cash needed and guess
what you have? You have your cash on cash return. Now, this is applied only when you own the property.
See this does not apply if you sell the property. If you sell the property, this number will go up
because you'll make more money but what I want you to know is how much money you're making while
you own the property because your exit strategy may be different. Maybe you want to refinance the
property and hold the property long-term. Well, then you know your cash on cash return. If you
sell it, this number is just going to skyrocket. And I also want to give you a free gift today.
For tuning in today, I want to give you my free multi-family master class that walks you through
the 5 ways to bust into the multi-family market without having any money of your own and
you can even do so in 10 weeks or less. Click the link in the description and go to freemultifamilymasterclass.com
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