Welcome to Hipster's first how-to video! I'm going to show you how to run very quick numbers on a rental property.
You can use this formula—so easy and so fast —for any property you're looking at.
It's so straightforward.
I'm going to do it on this little whiteboard here and use my calculator.
(Yes, it is actually that large).
I'll be behind the scenes here doing my calculations while I write out what is going on.
I'm using an actual rental property as an example.
It has a purchase price (you have to love my handwriting) of $100,000.
In rent (and always verify this before you buy any property.
Verify it with property managers or… just verify it), this particular house gets $1075.
00 in rent.
This house is in Indianapolis.
It was built in 2002, I think.
Super-cute little house.
Three bedroom, 2 bath.
But all we care about right now are the numbers.
I'm looking at this property.
What do I want to take into consideration? I write out my list of things that I need numbers for first: taxes, insurance (again, don't you love my handwriting), I always make an estimate for vacancies and repairs (which I'll touch base on in a second), and then for me I always use property management so I have that line.
That may be optional.
For sure, you're going to have taxes and insurance.
Vacancies and repairs are really up for your best guess.
I buy turnkeys so they're already rehabbed.
I use 7% for vacancies.
You can look up the statistics of a particular city and see if that number is about right.
And for repairs, like I said, fully rehabbed, so I just use 5% for repairs.
If you calculate this, this particular house the taxes per month (and this is all monthly) are about $60.
00 a month, which is excellent.
Insurance on this property is about $45.
Seven percent (and those percentages are of the monthly rent) of that is going to be $75.
Repairs are going to be 5% which is $54.
The property management in this case is 10% (should've put that there), and that would equal about $108.
Total all those up.
These are going to be all your expenses.
Grand total: $342 for monthly expenses.
Now, here's your income: $1075.
Here are your expenses: $342.
So do $1075.
00 minus $342.
00 and if you buy this property for all cash in theory per month you should be getting $733.
That is cash flow in your pocket per month.
To calculate your cap rate, you are going to do $733.
00 times 12 (because you want it annually) and the total amount that you paid for this house is $100,000.
00, which is going to equal… calculations…8796 divided by 100,000…you're going to get 0.
088, which equals 8.
This is your cap rate.
That is the main number.
That's going to explain to you kind of where the income is in relation to where the income is in relation to howmuch you paid for the property I know you're already asking (and I don't even have an eraser… let's see…hang on), I know you're already asking "Well, what if I'm financing because I've got a mortgage?" Ok.
Not a problem.
Let's erase this stuff.
You already know your expenses.
We're going to get rid this section.
We'll leave that $324.
00 for total expenses.
(I guess I could've written a little smaller.
) How do you deal with the mortgage? Well, $342.
00 was your total expenses without a mortgage.
All you need to do now is figure out what your mortgage payment per month is going to be.
Go online, find any old mortgage online calculator, plug in the numbers and see what your payment is going to be.
For this one, I used a 5% interest rate, and with 20% down (which is standard for an investment property), you're going to have a loan of $80,000.
00 (that's an $80K loan).
Your mortgage payment at a 5% interest rate is going to be $429.
00 per month.
Since the total expenses were $342.
00 already, just add those to $429.
This will be your new expenses… (am I doing that right?) $771.
Yeah so now you have Now you have $1075.
00 minus $771.
00 is going to give you $304.
00 per month.
This is your new net income after the mortgage payment.
On this house, you're still bringing home $304.
00 per month, which is ridiculous for a rental property.
That's amazing! That's $300 easy in your pocket per month.
The only thing you can do other than this is… you already have your cap rate…now you want to calculate your cash-on-cash return which ultimately for any purchase is all that matters.
Cap rates only explain whether you're getting a good price for the property or not.
Your cash-on-cash is actually how much you're making based on how much money you put into the deal.
00… make it annual, so times 12.
Then, instead of using your total purchase price, you want to put in how much money you actually put into the deal.
Your down payment on a $100,000.
00 house was probably $20,000.
thousand dollars I went ahead and rounded that up to $25,000 because you're probably going to have about $5000.
00 in closing cost.
That's going to give you 3648 divided by 25,000 equals 0.
Change that to a percentage and you are looking at a 14.
6% cash-on-cash return.
That is the number that you care about.
If you are paying all cash for the property all you care about is this 8.
8%, because your cap rate and your cash-on-cash will be the same for an all-cash buy.
For a finance buy (and this explains perfectly why I'm such a fan of leveraging money as much as possible), you're making almost 15% return on your money… on your actual cash that you invest.
That's amazing! With real estate prices gone up how they have, to be able to make a 15% cash-on-cash is great.
This is a fully rehabbed house.
Tenants are in it.
Property managers are in place.
The only work it took was for you to sign the papers and get a home inspection.
Boom! There are your numbers.
A very quick summary… We'll see if I can erase this super fast.
I'm not even going to try and erase it all.
I'll even do it in blue since I'm holding a blue marker here.
Step ONE: Calculate your expenses.
As a recap, that's going to be your taxes, insurance, property management fees, and estimate for vacancy and repairs, and then if you have the mortgage, the mortgage expenses.
You already know your income, so TWO: take your income minus your expenses and that will equal your net cash flow.
Don't ever buy a property that does not tell you that you're going to get a positive…Let's see… What did I say? Don't ever buy a property that suggests you're going to make a negative cash flow.
You always, always want positive.
THREE: Calculate the cap rate, which is your net income, times 12, divided by purchase price.
FOUR: If you're financing calculate your cash-on-cash… which is your net with the financing, times 12, divided by your cash in.
As a clarification point, the cap rate does not include any financing cost.
Your mortgage expense is not included in the expenses.
It has nothing to do with the equation.
That is standard.
Cap rates do not include financing.
It's assuming an all-cash purchase, because whether you finance or not (I like to say) is your own problem.
It has nothing to do with the purchase price.
What matters for you financers is the cash-on-cash, which does in fact take into account the mortgage expense.
That will calculate your official return.
Alright? That's easy rental property numbers.
Another…one last disclaimer… this does not include rehabs.
If you're rehabbing a property you have got to include those costs in these equations.
It takes a couple of extra steps.
It's still not a big deal.
In general… a general formula for you.
I hope it helps!.