In today's video, I'm going to be showing you exactly how to analyze a rental property
in about 10 minutes. So we are not going to bring out 100 different spreadsheets
and do 20 year forecasts and spend 4 hours analyzing one deal. I'm going to show you a
deal I actually just recently purchased, a few others that I was looking at, so you know in
about 10 minutes how to analyze a rental property. We are going to keep it nice and simple for the
people that are bad at math, like myself. Just a little background from where I'm coming from
with this advice and information, at the time of this recording, I own about $3 million worth of
rental properties, mostly small multifamily, and combined they make about six figures per year in
income that I take home. So I'm not just giving, this advice is not coming out of left field.
For some reason, in real estate investing, and online marketing, and just business in general,
the amount of unqualified people giving you advice is (beep) insane. People should come with
disclaimers before they give advice, as if they're saying it with absolute certainty, just (beep)
(beep) advice I've heard from different real estate agents and different people on my YouTube
channel, real estate investing in general, just completely unqualified. I promise on this channel,
I will only talk about things that I am qualified, I will give you a full disclaimer on everything.
That being said, let's jump into it. So, first of all, what's the point of even
buying rental properties? Well, if you buy rental properties, this is the one that I just purchased,
you want to get enough of these to the point where you're financially free and you can live on
a beach, if that's something you want to do. You want to trade these up, these little green guys
for the big red hotels, just like Monopoly, it's the same idea. There're ways to do that,
which I'll talk about in this video. Let's just take a look at this deal that I just purchased.
So the first thing you want to look at with a rental property is the 1% role. This is how I
evaluate rental properties that are small, multi family, smaller rental type properties. The 1%
rule, basically if a property costs $300,000, that's what you're going to purchase it for,
your monthly rent should be about 1% of that, that would be the 1% rule,
meaning the rent should be about $3,000. So this property I just purchased, it says
it sold for $228,000. I actually purchased it for $290,000, and I paid the wholesaler a pretty
substantial fee because he brought me a great deal. This Redfin estimate is actually completely
off, and actually, Redfin estimates are usually good, their brokerage (beep) (beep), but the
Redfin estimate is actually usually pretty good. For some reason, this one, I think because it's a
little bit smaller, it might be off a little bit. My knock against Redfin, of course,
is that they're a discount brokerage. So if you've ever worked with a discount brokerage,
you know you're going to have to hold on tight to your seats. Buckle up, it's going to be a rocky
ride, you don't know what's going to happen. A lot of these discount agents really are brand new,
and if you want to go the Payless Shoes route of purchasing a house, you can,
but I wouldn't recommend that for buying a house. There are better ways of saving money than using a
discount broker, like just finding a good deal. I bought it for $290,000, so purchase price
$290,000, right? Not a bad deal for a single family house in Washington, D.C.,
tell me when you can find one of those in 2021, or any time in the last couple years.
So if I'm buying the deal for $290,000, right, it needs to meet the 1% formula, so it should
be at about $3000. Now, the way you find the gross potential rent every single month is this. I like
to go Section 8, I like to go to DC Approved Rents and every city's going to have this,
this is one way to find the rental income. I like Section 8 because it's just guaranteed rent from
the government, and what's better than that? So this neighborhood is called Deanwood,
nice little neighborhood. If you're in Deanwood, stop by, say, "What's up?"
This property, it's two units. So on one level, there's two bedrooms, $1,552 without utilities.
It's a two unit building, so there's two of these, so $1552 times two,
that's about $3104. I do have to put a little bit of money into this property, it's not in
currently rented condition. So I'm going to put about $25,000. So, in total, that's going to bring
me to about, whatever, $3150. So I'll be pretty close, it's not going to be exact, but it's pretty
freaking close and it's such a cheap property. If I were to look at most deals in Washington,
D.C., anyone that knows the D.C.q market, it's very hard, especially in Washington, D.C.,
you go to PG County, you go other places, you can find 1%,
but in Washington, D.C., it's pretty hard to find the 1% rule. So if you're anywhere close,
if you're in an expensive market and you can get anywhere even close to the 1% rule,
it's probably a good deal, but what makes it an even better deal is the flip potential.
So when I purchase a rental property, I like to be able to sell it as a flip if I had to, if I had to
just liquidate it. So this deal actually works out from a flip perspective, as well as a rental
perspective. So here's my flip calculator and you can download this all for free on my website,
I'll put the link below, but this property would sell for about, maybe about $425,000 in as is
condition. I purchased it for $290,000 and let's just say we'll put $10,000 of repairs into it.
So that would be a profit of $80,000. I think this $425,000 number might be a little high,
because this duplex was actually kind of small. So let's just say,
let's be extra conservative, say $375,000. So, worst case scenario, I'd be making $30,000,
probably a little bit more than that, as a flip. So I like running them as rentals and flips. I
don't know if I've said that enough times, but that would be the way, number one, to evaluate
if it's a good rental deal. If you don't want to do Section 8, you can find out the rent,
you can just go on Craigslist and search by just "two bedroom apartments in Deanwood" or wherever
your neighborhood is. You can go to, I think it's Rentometer, and that can show you exactly, this
shows you how to get rental comps. So let's just try this real quick, let's see how accurate it is.
Okay. So it says the average is about $1300, which is pretty interesting
because I can actually get $1500 with Section 8. So a lot of people think you're paying less for
Section 8, Section 8, sometimes you can actually get more. So I'd be in the 70,
I'd be higher than the 75th percentile and it's guaranteed. So, I would use
Rentometer, Section 8, and Craigslist, and you can get a good idea of the gross rental income.
One thing to add is that there will be cities where a lot of properties
actually meet the 1% rule, like maybe Detroit, or Atlanta, or Baltimore, or different places.
So in that scenario, some people want it to be at the 2% rule, because if you're in some
neighborhoods, you really want to have that margin of safety there. So if every single
property meets the 1% rule, which is not the case in D.C., if I were to look at these deals,
most will not meet the 1% rule, basically none of them will, then you want to be more conservative
and go for the 2% rule, which basically just states that 2% of the purchase price should
be the equivalent of the monthly gross income. Now the next formula we're going to use to look at
deals, and I don't bring this out too much, this is better for more larger, multifamily properties,
but we're going to look at cap rate, and NOI, and that type of thing, in just a minute.
So the gross rental income on this, we already saw it was $1500 per month times two, so that
was $3104 per month, times 12 months, equals $37,248. So this would be the gross yearly income.
So this is how we're going to get cap rate. So although we're getting $37,000 per year gross,
there's going to be some expenses, like any rental property, so we put 5% for vacancies,
5% for maintenance, 10% property management, 5% capital expenses. So, that brings us to a
grand total of 25%, that we're going to take away from this number. So probably just multiply this
times 0.75 to get our net operating income. If you're doing larger multifamily, usually
people use actually 50% to take into account all these things, but this is kind of a small
rental property, it's not going to be 50%. So our net operating income for this one will be,
give me a second here, $27,936. So this is what we can expect to make, this does not include our
mortgage, right? So this is just the net income. My favorite place to actually get a good idea
of what your mortgage would be is just the Zillow mortgage calculator. You just go there,
this house price was $290,000, I actually got a private money loan, and I'm doing some refinancing
and some other stuff. For the purposes of this, just say you purchased it as a rental property,
typically a bank is going to want 20%, 25% down, however, if you get a good deal, they really only
need about 25% equity, so you might only have to put down 10%. Let's just say I put down 20%,
$300,000, here's the interest rate. If it's a condo, you might add some condo fees, HOA dues,
but this is not one of those. So my rough estimate would be about $1575. Obviously, it grosses $3104
per month, so there's a good margin in there, about $1,500 of gross income every single month.
Then, actually, if we take the NOI, divide that by 12, divide it by 12, equals $2328 per
month that we would probably get conservatively, that we would actually, that would be the net.
Then we would minus it from the $1575, and that would give us about $753 in cashflow
every single month. That's a pretty good amount. That's, hey, that's my brother's Tesla payment
right there, Matt, if you're watching this. What's up, guys? This is my brand new Model Y.
I need to step up my car game a little bit, so I might have to get a Tesla pretty soon.
He just got a pretty nice one. Overall, this is a good number to use,
basically just take away about 25% for just a rental property. If it's a multi, if it's a 10,
20, 30 unit, you might have to get to more like the 40%, 50%, but for these small ones,
25% is good. You can use these same exact numbers and get your NOI pretty quickly.
Then the cap rate is very easy to do. To get the cap rate, you just take the NOI, so that's
$27,976, divide it by the purchase price of $290,000, so that equals about a 9.6% cap rate,
which is pretty good. Usually in expensive markets, like if you're in San Francisco,
New York city, the cap rates might be like 4, 5, 6, 7%. So anything really around 10% is usually
pretty good if you're in an expensive market. If you're in Detroit or Baltimore and these
areas that don't ever appreciate in value, the cap rates might be a little bit higher,
so that's just something to keep in mind. Generally speaking, if you're
still analyzing the deal and you're not sure, just look at the last 5 or 10 deals that have sold,
and then try to be at the higher end of the cap rates, if not the highest, as far as the recent
sales have gone. I don't know if I ever mentioned this, but cap rate is just basically the rate of
return if you paid all cash for a property. So if you had no mortgage, paid all cash, this is your
rate of return, so just something to keep in mind. The next formula we're going to use to look
at rental properties is called the cash on cash return. So again, I don't get too much into this,
usually I stick to more of the 1% flip rule cap rate, but this is a good, quick way to
see what type of return you're getting. So you would take the NOI, the net operating income,
which we already determined was this amount right here. Like I said, you get the NOI from
taking the gross income, doing about 25% for all this, vacancies, expenses, management,
which brings you your NOI of $27,000. Then we did, the mortgage payment was about $1575 per month,
assuming a 20% down, $300k sales price, 4% interest rate, so this is just an example again,
and that brings us to a yearly mortgage payment of about $19,000.
Then to get the cash on cash, we include the down payment, closing costs, repairs, just all the cash
that you put into it. So you would take, first of all, you would take the NOI, which is $27,936,
you would subtract that from the yearly mortgage payment of $18,900. This would give you $9036,
and then, actually, you're supposed to divide that by the cash you put into the deal,
then that equals your cash on cash return. So in this case, we put down $60,000,
let's call it another 3% for closing costs, so let's just say we put in $70,000 total.
Then let's say we even put in $10,000 for repairs, so that's $80,000 into the deal.
Not all rental deals are like this. You can do deals where you only have to put down 3.5%,
like FHA, if you're house-hacking, so you don't need to put $80,000, not many people have $80,000,
that's just an example. So then we would divide that by $80,000. So $9036 divided by
$80,000 equals 11% cash on cash return, which is pretty good, not bad. I like getting double digits
on my money, I don't know about you. So that's how you analyze a rental property,
and if you want to know how to actually find these deals, how I find these deals on a consistent
basis, that are discounted, that have a ton of equity, cash flow, everything like that, watch
the video below on PropStream. I just basically go over exactly how I find these deals in, quote
unquote, "one of the most competitive markets out there". Everyone says their market's competitive,
Washington, D.C. is pretty competitive, but that's how I find these deals on a regular basis.
So watch that video, sign up for PropStream, use it. I'll put these formulas just in the comments
section below, so you can see them. If you have any questions, drop them in the comments section.
Be sure to watch this video right here, and I'll see you in the next one. Bye.