- [Seth] Hey there.
How you doin' today?
This is Seth and in this video I wanna show you
a really cool new rental property calculator
that I just discovered.
It's called PropertyREI
and what I like about this calculator is that it takes
a process that can be very confusing and complicated
and it just really simplifies it where you just have
to enter a few key numbers and inputs
and then it will give you all kinds of information
to help you analyze a deal.
It's really good at drawing your attention to the numbers
that really matter in the end.
This can be a really helpful tool for a lot
of different people and a lot of different situations.
For example, if you are an investor and you're trying
to analyze a property and decide if it's a good investment
decision before you buy it, this can be used for that.
If you're a wholesaler and you're trying to bring a deal
to another investor and you're trying to illustrate to them
why it might be a good deal that's worth pursuing,
or say if you're a real estate agent
and you've got a property that you think one of your buyers
might want to take a look at, this is another way to show
them all the numbers and give them all the information
that they're gonna need in order to decide
whether or not this is a deal that they want to pursue.
And as with any rental property calculator like this,
the accuracy of your numbers has absolutely everything
to do with the accuracy of your assumptions,
so where you're getting the data to plug into this
is extremely important 'cause that's going
to determine the entire outcome.
So, with that in mind, it's gonna be really important that
when you find numbers like the monthly rent revenue
and the expenses and the property taxes and the vacancy rate
and all of that stuff, don't just listen to what the seller
tells you and assume it's the Gospel truth
because many, many times it's not gonna be.
With every single one of these numbers you're gonna want
to go to great lengths to verify and make sure that you're
actually looking at accurate, reasonable numbers.
If you're preparing this information for another buyer
to look at, say if you're like a realtor or a wholesaler,
just make sure that they understand that this is not
necessarily any kind of a guarantee.
It's just a very detailed calculation based on the best
information that you were able to get.
So, with that said, I'm just gonna take a few minutes
and bring you through this calculator
and show you exactly how it works.
As I think you'll see, it's a really nice tool
that puts together some great information
and it can really be used for just about any type
of income-producing real estate whether it be, you know,
a small single-family house
or a five hundred unit apartment complex.
I mean, all of that stuff will work.
It's just a matter of following the same process
and getting it the right information,
pluggin' it in here, and it will tell you pretty clearly
whether or not it's a deal that you want to pursue.
So in this example I'm gonna show you a recent deal I did
where I had a small house under contract
and it wasn't something I wanted to buy,
but I was able to find another investor
and wholesale it to them, so I just took the contract
and assigned it to them and they closed on it.
In that process, I got all the pertinent details
and I put it in here and was able to find out
that it was a pretty solid deal and I was able
to get comfortable with it
and then the buyer was able to get comfortable with it.
So this particular property, this was a very small house,
just 700 square feet.
And this right here, you don't necessarily have
to pay attention to it, but sometimes investors like
to see the long-term plan of what this property
and investment is going to look like
over the next 10 years or the next 15, 20, 30 years.
This can be helpful if the plan is for you
to hold this for a defined period of time
and then increase the rent price,
watch the appreciation go up, and then re-sell it
for a higher price at the end of that 10 or 15 or 30 years.
So if that's something you want to look at,
this calculator has the ability to do that as well,
which is pretty cool.
For this tiny little house we were looking at,
the monthly rent revenue that the seller told us was
about $750 a month and I actually ended up verifying
that number with my property manager who confirmed that
that was a reasonable number in that area.
I also got a Schedule E of the seller's tax return
so we could see and verify that they actually made
that amount per month in the prior tax year.
Other monthly income, say if you had like vending machines
or coin laundry or something like that,
that's the kind of thing you would put here,
but again, I'm just gonna put zero 'cause it doesn't apply
in this situation.
Vacancy rates.
I always put in 10%.
That's a pretty conservative number in my area,
but this could obviously change based on your location
and the state of the economy
and the real estate market and all that, so.
And then the annual increase in rent is 3%
and this doesn't necessarily have to happen
in equal increments each year, but it's basically sayin'
that over the course of the time period
that we own this property, it's a reasonable assumption
to think that we will be able to increase
the rent revenue incrementally by 3% each year
by the time we get to the end of that.
So it's not like that's necessarily happening
like clockwork each year, but that's kinda
where we're thinkin' it's gonna go.
In this example, my buyer actually ended up paying cash
for it, so if you're working with a cash buyer
or if you are planning to buy the property yourself
with cash and not get any financing
that you can click this drop-down and pick that
and then all these other variables go away.
If we go up here to the property acquisition section,
this is where we put the purchase price.
This property I was able to get under contract for $25,000
and then I also got a $2,500 assignment fee,
so the total purchase price for this buyer was $27,500.
The closing cost for this project was about $1,500
which is actually about 5.5% of closing costs,
but generally speaking, 5% of the purchase price
is usually a pretty safe bet in terms of
what those closing costs are gonna be.
So moving on, deferred maintenance costs.
This particular property needed a few small things
to be done to it, but not a lot,
so we just factored in $2,500 just to take care
of the immediate, most pressing issues.
Moving on down here to the operating expenses.
Whenever I get to this section of my calculations,
I always know that this is an area where there's a lot
of potential for me to make mistakes and mess things up
which can then skew the entire calculation,
so it's very important that with each one of these things
you actually need to verify these numbers and be very, very
sure about what you're putting in here.
Don't just guess or believe whatever the seller tells you.
You need to actually have some educated assumptions
that you're workin' with here.
So property taxes.
This one was fairly easy because I was able to look up
what this property owner had been paying for the
property tax bill to the city for the past several years
and I was also able to see the number on the Schedule E
of their tax return when I got it.
And in the most recent year they had paid $1,464
and also keep in mind that depending on how much you're
paying for this property relative
to what the seller paid when they bought it.
In most cities and municipalities,
whenever you purchase a property,
it kinda takes the cap off of what the property taxes are
and it allows the assessor to reassess
and then the treasurer can readjust
what those annual property taxes are.
So just keep in mind, even though you might be able
to find out exactly what they paid in their taxes last year,
does not necessarily reflect what you're gonna be payin'
going forward because if you're paying a lot more
for your property, those taxes are probably gonna go up
and if you're paying a lot less,
then those property taxes could very well go down.
So just keep that in mind as you're doing your research
and coming up with this number.
If you have any inclination as to which direction
it's gonna go, it's not a bad idea just to round it up
or down based on what you think could happen.
Moving on to insurance.
I was able to get this number pretty quickly just by talkin'
to my insurance agent, but I was also able
to see this number in the seller's tax return as well.
In this case, $553 was the number I came up with
so we'll put that in there.
And then for utilities, I came up with the number of $900
and that again, was based on that not only
the seller's tax return, but also just some of my experience
owning similar properties in the same area.
In my area, it's pretty normal for landlords to pay
for the annual water bill,
but not the electricity or the gas bill.
So that's just kinda where this number came from.
And then advertising.
I've actually got a property management company
and I pay them a fee every time they place a tenant.
This is on top of the 10% of my gross rents
that I pay them every single month.
So given that that's already sorta factored
into this calculation which we're gonna get to below,
I'm gonna be leaving this one blank.
Then HOA fees.
This particular property was not part of an HOA,
so that's gonna stay at zero as well.
Property management, I got 10% factored in there.
Maintenance and repairs, I have 10% factored in there
as well and then annual increase in expenses.
I'm just assuming that that's gonna be 3%.
So if I wanted to change that for any reason,
I could easily do that.
Okay now, once we've got all those expenses entered in,
we can go down here and look at this section
where it shows out total purchase cost,
so that's showing our purchase price plus the closing costs
plus the deferred maintenance costs
that we'll have to pay right out of the gate
which comes out to $31,375 in this case,
so pretty cheap for a house.
Then the effective tax rate that I'm assuming here
is just 20%, and again, this number can change a lot
based on the actual end buyer and the owner
and what their tax rate is, but 20% is pretty much in line
with my buyer and myself for that matter,
so I'm just gonna leave that as is.
Then these two things down here generally you shouldn't have
to change much, if at all, assuming you're buying
a residential structure of some kind.
The depreciation term is always gonna be 27.5
and the land allocation percentage for depreciation
is almost always gonna be at 10% or pretty close to that.
So you can just leave those as is.
And then lastly, when you go up here you can see just a
quick cash flow summary of what this deal's gonna look like.
There's actually a lot more of this information
in the following sheets of this spreadsheet,
so let's move on to the next few steps here.
This right here is extremely helpful, say if you ever wanted
to get bank financing and you needed
to show some projections of what the performance
of this property is gonna look like.
A lot of times real estate investment bankers,
when they're doing their analysis,
are gonna be puttin' together a lot of this stuff themselves
if you don't already have it.
So if you've already got your numbers nailed down,
this is just a very, very helpful thing to have.
Just present them and make their process a lot easier
and it's also gonna give you a lot more credibility
because you're showing that you've actually
done your homework and you know what you're doing
and you are fully armed with all the information
that you need to make a smart investment decision.
So moving on to the next step, the executive summary.
I really like this part of the calculator because it gives
you some really helpful visual aids that I've never
really seen in any other calculators like this.
It also just draws your attention to some
of the most key, crucial details
that you're gonna want to know before you move forward.
For example, net operating income.
If you do this deal and if everything comes to pass
just like you predicted it would, then that is the amount
of money that's gonna go in your pocket
after expenses at the end of each year.
Then the next one over, annual cash flow.
That's actually the amount that you are going to keep
in your pocket because that's factoring in the taxes
you'll have to pay based on this 20% effective tax rate
that you listed here in the very beginning.
So if you were to change this to say, you know, 30%
that would change your annual cash flow here as well.
So if you wanna look at the whole picture of reality
including the part that nobody likes to talk about
or think about, which is your taxes, that's gonna be
your most accurate, realistic number.
And then the cap rate, that's another thing
that a lot of investors and bankers are gonna be
very interested in knowing.
That's your net operating income
divided by your purchase price.
And then moving on here to the key assumptions
and cash flow summary.
These are pretty straightforward numbers here
and there's not a lot goin' on
because we're not including financing here.
One thing I always like to look at
is the cash on cash return and this number is basically
telling you how hard your cash is working for you.
So based on how much of your money that you're putting
into the deal out of your own pocket,
what kind of return are you getting on that?
And this number is calculated
by taking your annual cash flow and dividing that
by the actual dollars you are having to put into this deal
to buy it which, in this case,
comes out to a total of $31,375.
So that's where that comes from.
If we were doing this deal differently
and doing a mortgage on it,
say if we were only puttin' down 20%
and had an interest rate of 4% over a term of 30 years,
then obviously your cash required to purchase the property
would be a lot less at $9,375.
And that would change this number substantially
to a much higher cash on cash return of 20.7%.
So basically, in that case, if you were to get financing,
the dollars you're putting into the deal are gonna work
a lot harder for you because you're leveraging the benefit
of other people's money which is a pretty powerful thing,
especially if you're doing it right.
However, it's also gonna affect your annual cash flow
because you've got monthly loan payments you have to make,
so it's not necessarily going to give you
the highest cash flow, but it is going to make your money
work harder, if that makes sense.
But again, the beauty of this calculator is
you really just have to click a few buttons
and it will figure all this stuff out for you
and help you get to the answers you're trying to find
in a pretty quick and concise way
which I think is just awesome.
Moving on to the next section here, the ratio analysis.
This is kind of just a review of some of the numbers
that we've already seen along with some new numbers
like the gross rent per square foot that you're getting,
the operating expense ratio, break even ratio.
Stuff that bankers and high-level investors
are usually gonna want to look at.
And if you're ever not clear
on what any of these things mean,
they've actually got a really nice glossary included
as one of the sheets in this calculator as well
where they explain all of that.
There is also a instruction sheet at the very beginning
of this where they go through a lot of this stuff as well.
So just keep that in mind if you see anything
that just doesn't make sense or seems confusing.
They really did a good job of explaining this
if you're not sure what the answers are.
Then movin' on here to the amortization schedule.
This does not apply in this deal 'cause again this was just
a cash purchase, however, if we go back here
to the dashboard and change this back to a mortgage,
the amortization schedule will basically just lay out
for you how much you're gonna have to pay in principle
and interest and in total payments every single year
of the life of the loan.
And then movin' on to the next sheet,
the property sale price forecast.
This is really just something that you can look at
if you are doing that 10-year scenario where your plan is
to buy this property, own it for 10 years,
increase the rent, watch the appreciation go up
over that time-frame and then re-sell it for a higher price.
This just does a really good job of laying out
what those numbers are gonna look like
if that's something you're concerned about.
And then again the next page is this glossary
and then that's pretty much it.
So this example I'm using here, most properties and houses
and duplexes and multi-family properties that you buy
are not gonna have numbers this small.
It's more like adding several zeroes
to the end of everything here.
But regardless of the situation
and what kind of property we're lookin' at,
this is just a very, very helpful straightforward tool
where you can plug in the numbers regardless
of how big or small the deal is.
And it's gonna spit out some very, very helpful information
that a lot of people are gonna be very interested in seeing.
It basically just takes a lot of information that can really
honestly get somewhat complicated and it just greatly
simplifies it and draws your attention to the numbers
that are most important, that you're really gonna care about
and that any investors or bankers or other people involved
with the deal are gonna care about as well.
And another beautiful thing about it is just that.
It is beautiful.
I've worked with other rental property calculators
kinda like this before, but I mean, they did not look
even close to this well put together
where they show you graphs and charts
and all the information in a way that really
draws your attention to the parts that matter.
And then lastly, as one of the little tip to keep in mind,
if you ever want to like print these off or put 'em together
in a nice package and present these calculations
to somebody, all you gotta do if you've got Microsoft Excel
like I'm using here, is go up to File, and then Save As,
and then save the document as a PDF.
And once you do that, as you'll see,
is just a really nice-looking package of information
that just sorta lays everything out for you
and it looks really easy to follow and easy to read
and it's pretty much exactly what you would want to see
if you were gonna present this to a partner
or another investor or an end buyer
or a banker or anything like that.
It's just as simple as saving it as a PDF or printin' it out
and you'll be good to go.
So that's pretty much it.
I hope you can see just how versatile and helpful
this kinda tool can be if you're interested
in buying any kind of income-producing property.
This is the calculator that I'm using for all the new
rental property deals that I'm lookin' at these days
and I've found it to be just really, really helpful
and easy to use and easy to follow.
So if you are interested in gettin' a copy
of this calculator for yourself, I'm gonna have a link
below this video to the PropertyREI website
where you can go and it should look something like this.
It's just a little sales page with a short video,
explains how it works and all that stuff,
but if you want to pull the trigger, all you gotta do is
click on Buy Now and I actually have a way for you
to save a little bit of money.
All you gotta do is scroll down here to where is says
Buy REI Now and click on this
and then you'll see this kind of a box pop up here
and you can click right here where it says,
"Have A Promo Code?"
Click that and then put RETIPSTER and then the number one
in there and once you do that and hit enter,
you'll notice that the price down here drops down
to $42.30 from $47, so you just saved yourself a quick 10%.
Why not, right?
I do have an affiliate relationship with PropertyREI
'cause I think it's a great product
and I use it all the time, so I will get a small cut
of that if you decide to purchase it.
And if not, if you've got some other way
to evaluate your deals and I wish you all the best
with however you're currently analyzing your information.
Either way, I thought PropertyREI was awesome.
I think you'll probably feel the same way
if you decide to go with it.
But yeah, that's pretty much all there is to it.
Thanks again for watchin' and I wish you all the best
with your next rental property.