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The BetterLife Podcast
How to Analyze a Rental Property... The 5 Essentials You Need to Know Before Investing | Ep 140
00:11:02
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This is the Better Life podcast where we talk about real estate investing, building wealth, and all in all, living a better life. My name is Brendan Turner and I've spent my life investing in real estate to achieve financial freedom. And alongside My co host, Mr. Cam Cathcart, we want to help you do the same. On the show, you're going to hear from world class guests who have been handpicked to help you level up your investing, your leadership, your goals, your habits and more to become the very best version of yourself. So join us as we explore the habits, the actions, the beliefs that it takes to build wealth through real estate investing without losing your soul. All right everybody, let's talk deal analysis today. So I've been preaching this for decade or longer, right? Like deal analysis. Knowing how to run the numbers on a rental property is like the most important thing. Like if you can't get that right, it doesn't really matter how good of a property manager you are, it doesn't really matter how good you are at finding deals. You could be the best wholesaler in the world finding all these great deals. If you can't do your math, it just doesn't matter. You have to be good at the math. You make your money when you buy. How do you know that? The math, that's what shows you it. But the vast majority of real estate investors don't know how to actually underwrite a deal. Most people buy based on their gut, based on just a preliminary napkin analysis based on what they think is going to be a good deal, based on smoking a lot of hopium, just hoping that it's going to be good, but they don't actually know if it's a good deal or not. So today I'm going to lay out a bunch of stuff all around deal analysis. I really want this to be like the ultimate guide to looking at cash flowing rental properties, whether or not you should buy them or not. I'm going to lay out what I call four theories of analysis. I'm going to talk through big difference between phantom cash flow and pure cash flow. You've probably heard me rant on this before, I'm gonna do it again. Cause I just am so tired of people losing properties, going bankrupt, beginning foreclosed on because they don't know how to analyze deals, right? We're gonna talk about the four square method. You may have seen that video on YouTube. I'm gonna actually gonna walk through each of those squares on how to analyze rental properties by hand. We'll talk about some of the most Common expenses. I'll lay out 13 or so of the most common expenses you're gonna find owning rental properties. We'll talk about kind of how to find those numbers and how to really know what to plug in there. We'll talk about Capex. Capex is one of the biggest, most misunderstood expense drives people nuts, and it makes them buy properties they shouldn't buy and do deals they shouldn't do. Repairs are also a big piece of that. We'll talk about what is a good roi, what does that even mean? Or what's a good overall return? What should we be shooting for today? Phantom versus pure cash flow. Phantom cash flow is how most people, especially newbies, analyze rental properties. They say, well, my rent is $2,000. You know, I got a $1,200 loan, and then I got to pay about $100 a month in insurance. And taxes are a couple hundred bucks. Most people know to include taxes and insurance in their loan. Not everybody. You guys, you'd be shocked at the number of Prof. Formas that I've seen from brokers, like from real estate brokers selling investment properties, and they forget to include taxes and insurance. It's actually fairly common, which is just another tip I'll give you. Never, ever, ever, ever let anybody else do your math. Like, never trust an agent, Never trust somebody else to do your math homework. That is your job, to be good at the math until you get to a point where you're so successful and loaded that you can hire an underwriter on your team. Even then, like, I have multiple underwriters. I still review deals. At the top left quadrant, you have your income, gross rental income, which would be like the total rent that comes in. But you might have other income. Laundry machine income, storage income, if you have like some storage units. And I would encourage you guys to think when you're looking at a property, how can I maximize my income? There's a great book out there called Landlording on autopilot by Mike Butler. Anybody read that one? It's a great. Mike Butler's like this old school landlord from like, Kentucky. But that book made a big impact on me because he's just so practical. But he does some funny stuff for increasing income. He's got a lot of income increasing ideas. But, like, one of them is he, like, he doesn't provide deadbolt. Oh, you want a deadbolt? A deadbolt's $10 a month. Now, I'm not saying you should go that far. It's a funny idea, though, especially when you have a portfolio of 40, 50, 60, 100 units and you're charging $10 a month. And most tenants, when you're signing a lease, you're like, do you want a deadbolt with an electric keypad? Just 10 bucks a month more. Yeah, actually that would be great. It's only $10. That adds up with a lot of units, with a lot of properties. So I get it. Sometimes there's a different use for your property. You're like, well, I'm using it as a normal rental, but what if I rented it by the room? So I have a four bedroom house and this four bedroom house currently rents for $3,000 a month. But what if I rented each bedroom out for 1200 bucks apiece and now I'm getting $4800 a month in rent on rent by the room. Now is it more hell to manage? Of course, you got four separate tenants instead of one. Is that amount worth eighteen hundred dollars a month in extra cash flow? Would be for me. If you talk about eighteen hundred dollars over the course of a year, you're at like, what is that, almost $20,000? Am I doing that math right? Yeah, it's like $20,000 a little bit more. I think in additional now cash flow, that's an extra $400,000 in valuation on a property at a 5 cap. That's wild. So part of knowing income is also knowing potential income. Next we go to expenses and there's a lot of them to give you a whole list here you have the loan, you have insurance, you have utilities. Utilities can include water, sewer, garbage, electricity, gas, taxes, of course. You got repairs, you got capex, you got vacancy. We are talking about that your property sits empty once in a while. You got pest control, you got snow removal, maybe landscaping, maybe management get legal. Like I talked about LLC formations and other legal legal documents and then just random miscellaneous other stuff. Now it's important that we don't just analyze expenses for how they have been. This is a big mistake that in landlords make all the time that newbies especially make. We analyze based on how things have been. When you get a pro forma from a real estate investor or real estate agent, they're typically showing you how it's been. They'll give you maybe a trillion 12 or a T12 it's called. It's like here's how it's been. And that's fine, it's better than nothing. But I also always want to know like, is it really going to stay that way? Is that what it's going to Be the big one there to wonder is taxes. Different areas account for taxes differently. This is one of the most important things when analyzing a deal. The taxes may be $3,000 a year right now, but how does your local county decide when to raise taxes? Is it based on the sale price when the property sells or is it just refigured every couple of years or every year or every five years? Let's just say your area only reassesses when a proper is sold and the property hasn't been sold in 15 years. So you're analyzing for $3,000 a year for taxes and you don't realize that they're going to reassess as soon as you buy it for way more than they paid 15 years ago. And all of a sudden now your taxes are not 3,000 a year, they're 12,000 a year. And that deal, that was a $500 a month deal, suddenly became a $5,000 a year loss. How do you assess taxes? You can call the county assessor, you can talk to them. You can go down there and just say, hey, I'm a new real estate investor, I'm trying to buy properties. Can you just help me understand so I don't mess this up? Like who's going to fault you on that? You know, like they're going to sit down, they're going to explain it to you, they're people. Capex is the saving up money or the setting aside. You don't have to physically set it aside, but the idea of the replacement of large items in your property. So we're not talking about just repairing things. Like when a tenant gets angry and they punch the wall and they put a hole in the wall and you have to send somebody over there to patch up that wall. Yes, that happens. If you are a landlord, you probably know that happens. That's a repair. When the refrigerator goes out and you need a brand new fridge, that is Cap X. When your fridge light bulb goes out and you need a new light bulb, that's a repair. The roof is 25 to 30 years, then it dies. Well, let me ask you, how much does a brand new roof cost? I can tell you I just put one on. It was $30,000 to put on a new roof on a property I had here in Hawaii. So in other words, if it lasts 30 years and it's $30,000, I should be setting aside about $1,000 every single month for a roof. Now, I don't have to physically set it aside, but I want to account for that. Now again that was an expensive roof. Not all roofs got that much water heater. Seven to 10 years. What's a new water heater cost? If you have a plumber come put it in, what, two grand every 10 years? That's a real number. I third, we got cash flow. So we started with income, and we got our total income, a number we really feel comfortable with on average every month. What are we bringing in then? We now have our real expenses, our actual expenses, which we take our total income, our pure income, and subtract out our pure expenses. We're left with our monthly pure cash flow. And that number I care a lot about. That's the number that I like to say. I want at least $100 per month, per unit. Now, that number can go up or down depending on different factors. We can talk about that in a little bit. But ultimately, I would love to know monthly pure cash flow, because that is your financial freedom ticket, right? Most people don't get rich off cash flow, but we're able to quit our jobs off cash flow. You got to get that pure cash flow coming in. Otherwise you're just spinning your wheels for decades trying to invest in real estate, not making any money. Forty years later, you're getting divorced, bankrupt in the same year. Don't do that. And now we want to know our return. In other words, before I go there, what do I. What do I mean? Well, I mean, if I told you that a property made $1,000 a year in cash flow, is that a good amount of cash flow? What do you think, thousand dollars a year, is that good? Depends, right? Depends on what? Depends on how much money you put into it. If you put in a billion dollars of your money, 1 billion with a B, and you made $1,000 a year, is that a good investment? Of course not. If you put in $1 into a deal and you made 1,000 bucks a year investment, that sounds awesome, all day long, I'd do that deal right now. Assuming it didn't need a ton of like, my hourly money, like my hourly life. That sounds pretty great. So the way that we then look at, yes, we care about pure cash, we have to balance it with the return. And what we look at primarily what I care most about is cash on cash return. That means it is the total amount of money you have invested in the deal, all the money that came out of your pocket to buy the property, divided by the annual pure cash flow. That means 1000 divided by 10,000. That is a 10% cash on cash return. We want every single one of you to have that financial life, personal life, the relationships that you deserve and that you desire. So let us help you get that. And while we do that, we're going to build this tribe and give away millions of dollars in the profits. That's the plan. Thank you all. And that, my friends, is the show. Thank you for tuning in. And hey, before you go, if you enjoyed this episode or if you just enjoy the show in general, please consider leaving us a rating and review. Wherever you listen to podcasts, we really do value your feedback and we read the comments, we make future decisions about topics and guests and everything else. Plus, it helps us reach more people. And the more reviews we get, the more people hear it and watch the show and share it. And it's. It's awesome. Last but not least, please head over to social media. Consider befriending me, following me, subscribing to all that stuff at Better Life and my personal page at Beardy Brandon. Especially if we're new, Instagram, YouTube, and really everywhere else. So thank you again for listening. I'm honored that you would bring me along on your journey toward building wealth through real estate investing without losing your soul. Now, this show is about living a better life, but if you want my opinion on what it takes to live the best life ever, just go to abetterlife.com bestlife to hear some of my views on life and spirituality. I think you'll like it. Abetterlife.com BestLife with that said, thanks for listening to the show. We'll see you next week.