How To Buy A Rental Property | Part 4 Real Estate Analysis
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How To Buy A Rental Property | Part 4 Real Estate Analysis

what’s up guys it’s James Allen the
out-of-state investor and today we’re going to continue with our mini series
of get into part four of how to buy a rental property where I’m going to talk
about establishing your buying criteria getting your leads and teach you how to
do some serious real estate analysis as you’re analyzing potential deals if you
learn how to do this the right way you’ll buy good deals avoid the bad ones
and start to generate cash flow every single month if you’re just tuning in
and you haven’t seen parts 1 to 3 of this series yet go ahead and make sure to
watch those videos as well to get a full perspective on how to buy a rental
property I’ve attached links to those episodes in the description below now
before I get started go ahead and smash that like button and subscribe to the
channel to get notified for new real estate videos like this one with that
said let’s get started in order to start getting leads and analyzing deals you
first need to establish your buying criteria for buying criteria you’re
gonna have to explain to your Realtor and wholesaler exactly what it is you’re
looking for I recommend taking time to figure this out before you meet with
your team members so that they know that you’re taking this process seriously
there’s nothing worse than sitting down with an agent having them ask you what
it is you’re looking for and you just stare back at them with a blank face saying I don’t know what do you think this tells them you’re not a serious investor and
it’s not a good first impression to make for buying criteria you’re going to want
to know exactly what it is you’re looking for when it comes to property
type price point number of beds and baths square footage year built and
property condition for property type I recommend starting off with single
family or two to four unit multifamily properties for single family I like to
go with two or three bed houses I also recommend asking your property manager
if they see a stronger for rental demand for a 3 bed or a two-bed house in your
area 4 bed houses and Beyond are normally not a good idea because there’s
rarely a strong demand for those kind of rentals and you won’t get much more rent
for that extra fourth bedroom either price point should ideally be under
$150,000 and preferably under $100,000 if you really want to see
some decent cash flow for multifamily I recommend sticking to properties where
the majority of units have two or more bedrooms this will give you less
turnover which is a good thing because multifamily already sees a high turnover
rate compared to single-family for multifamily it’s hard to give you a good
price point to target because it really depends on so many different things for
me it really comes down to the cash on cash return to determine if it’s a good
deal or not for square footage on a single-family I
normally like to go for at least a thousand square feet on a three-bed with 1,100
square feet being even more preferable whereas on a two-bed I can work with 750
square feet or more for a year built the big thing to keep in mind is that the
older you get the more maintenance you’re gonna be dealing with and you may
need to start seriously addressing issues with the plumbing and electrical
houses built after 1980 are great to target if you’re looking for something
with less to worry about the house is built after 1980 are less susceptible to
major problems you could come across including things like lead-based paint
asbestos aluminum wiring and galvanized steel plumbing to just mention a few
with that said I still buy older properties but it’s important to be
aware of what an older property comes with last thing to figure out is your
property condition a property in turnkey condition is one option and it’s exactly
how it sounds it’s normally a perfect condition with everything fixed up for
you so that all you have to do is literally just turn the key normally
it’s either priced at market value or a little higher the market value and
you’ll get lower returns on your cash flow but it’s gonna be a more passive
investment for you and it’ll take a lot less work on your end so for someone
trying to find a property with minimal work this could be a great option for
you with that said I personally recommend going for a property with a
value-add element cosmetic fixer uppers can be great
properties to buy and can be found at a discount price plus they won’t take
crazy amounts of money to rehab compared with a complete gut job these properties
will come with an ugly or messed-up kitchen bathroom flooring in need of new
paint maybe or other cosmetic fixes like that and they can be
Great Houses to purchase below market value and then you can renovate them to
force appreciation so now that we talked about your buying criteria let’s talk
about getting your leads your realtor and your wholesaler can be a great
source of leads to get started ask your Realtor to set you up with automatic
email alerts these will automatically notify you whenever new property meeting
your criteria hits the market and it also gives you access to check out those
listings on the MLS this will be a great way to get started with getting leads
sent your way other ways you can do this is you can also set up those same alerts
on Zillow Redfin or you can also filter your buying criteria and see
what’s on the market at that moment for off-market deals wholesalers will be
your best bet to send you consistent deals every wholesaler has an email list
that they have that they send deals out to so make sure to give them your
contact info so that they can add you to that list and start sending you deals on
a consistent basis also make sure you understand that most wholesalers want to
quick close which means that you’re gonna need to pay all cash for the deal
when a wholesaler gets a property under contract they’ll email that property to
everybody on that email list along with their estimates for rehab costs what
kind of rent it can bring in and the after repair value now as far as numbers
go completely ignore any estimates they wrote down wholesalers are notorious for
exaggerated numbers so you’re gonna want to know your own numbers if you’re
really gonna mitigate risk on a property so with that said how do you figure out
the numbers on a rental property and how do you know if it’s a good deal well
there was a good questions to ask and I’m glad you brought it up so the most
important thing you’re gonna look at when you’re analyzing a rental property
is the cash flow and the cash on cash return appreciation is also good to
consider and there are definitely ways to increase your chances of that which I
did talk about in part 2 of this series but really appreciation should be seen
as the icing on the cake when it comes to cash flow you’re just talking about
what you make when you take your income minus your expenses a good rental
property will bring in enough income to be cash flowing after all expenses are
covered now this may sound easy but the expenses
is honestly where most people screw it up
you see most people will be like my rental income on this property is $1,500
a month and my mortgage is only $1,100 a month so that means they’re gonna be
cash flowing $400 right wrong there’s a lot of expenses you need to consider
when you’re running the numbers on a rental property this includes your
mortgage your property taxes your insurance property management
maintenance capex vacancy water sewer trash electrical gas HOA fees flood
insurance lawn care and snow removal yep it’s a lot I know it’s a lot to remember
so right now what I want to do is I actually want to look at a deal that’s
literally on the market right now and I want to walk you through exactly how I
analyze a deal and find out the cash flow the cash on cash return and whether
I feel like it’s a good deal or a bad deal all right guys so I found this
property that’s on the market is in the city of Knoxville Tennessee which is an
area that I invest in and I’m actually familiar with this particular
neighborhood and it’s a pretty decent area it’s been on the market eight days
price point is ninety seven thousand three beds one and a half baths 1404
square feet it’s a solid size for a rental property so let’s go ahead and
check out the pictures inside and so as you can see definitely a fixer-upper of
sorts definitely room to add value new paint new flooring fix those bathrooms
new light fixtures so yeah definitely room to force appreciation and that is
exactly what you want to look for as an investor it’s built in 1971 these are
the expenses right here but before I get into that I want to go ahead and show
you this now this is a copy of my cash flow spreadsheet now I attached a link
in the description below so that you guys can utilize this and analyze your
own deals with this cash flow spreadsheet and so all you got to do is
input your numbers your income your expenses it gives you all the expenses
you need to worry about so don’t forget anything okay and it will
automatically calculate your monthly cash flow your annual cash flow and your
cash on cash return which is of course the most important metric when you’re
analyzing rental properties so with that said let’s start with the rental income
okay now aside from using your property management which is of course the best
way to go to get an idea of what your rental income will be I do like to use
this website called rent ometer and I’ve already input the address in here and
I’ve done it for three bed comparables over the last six months search radius
of a mile-and-a-half building type house duplex of course we’re gonna focus on
single-family houses but it doesn’t give us just that option so we’re gonna use
that for now and it breaks down the average in the median rental income so
we can see our average is 1225 and our median is 1213 okay now the thing is is
I like to go off of the median rather than the average okay and the reason
that is is that for the average it just takes a few of these houses to be much
larger or or maybe completely renovated for it to completely throw the average
out of whack and so that’s why I prefer to go off of the median so with that said
let’s let’s take a little deeper look here this is our property that we’re
analyzing the little star there okay and I like to look at the properties that
are closest to that to our property so these these ones are really close three
beds 1125 for this one it’s just a little bit lower than our median this
one right here is 1100 so that’s two houses right there that are a bit lower
than our median price now there’s this one if it’s red that typically means
it’s just a lot higher than the median or average price it’s 1495 which is quite
a large jump from these other two I was just looking at so that probably means
I’m just guessing here but it probably just means that that house is a lot
larger or updated something like that but the thing is we want to double check these things and the way we do that is we take these addresses we copy and paste them
into Google and there’ll be links for like Zillow or Redfin that you can
click on for those properties and and you can check those stats or specs for
the house you know is it a you know cuz the three bed could be a nine hundred
square foot house it could be a two thousand square foot house a three bed
could have one bath or it could have two and a half baths it could be completely
updated it could be completely outdated so the thing is is that those things
make a huge difference on the amount of rental income you bring in so you want
to make sure you’re double-checking these things to make sure you have a
accurate number that you’re working with so for now I’m gonna go with eleven
hundred dollars that’s the lowest I saw there and I just want to be extra
conservative at the moment so let’s do eleven hundred okay now we’re in our
expenses so let’s go back over to red fin now I used a five point five percent
interest rate that is the going rate at the moment our mortgage is our principal
and interest right here so that’s four forty one a month so let’s go ahead and
put that in there property taxes eighty-one and fifty three for
homeowners insurance now property taxes you want to verify that number by
checking your county tax assessor’s websites okay that will give you the
actual property taxes for this property homeowners insurance you want to verify
that number by reaching out to insurance agents and getting actual quotes on the
property for now we’re gonna run with these numbers that they have here but
and a lot of times they’re actually pretty accurate to be honest but you
just want to be absolutely certain that these are accurate numbers you’re
working with so with that said let’s continue property management I’m gonna
use about 10% of the rental income for that number now my property management
actually only charges me eight percent but I like to use ten percent and give
it that extra two percent just for extra fees like the leasing fees or lease
renewals and extra things like that that come along with property management
I just want to budget that in to my numbers so then I have maintenance
that’s just all the little repairs that are needed throughout ownership I’m
gonna budget about seven percent of my rental income on that vacancy your
property is gonna get vacant at some point and so you want to budget for that
now I like to do about eight percent for vacancy I may see less than that but um
you know for me I think budgeting about a month’s time eight percent is roughly
about a month’s worth of vacancy so I’m budgeted by 8 percent capex that stands
for capital expenditures which is basically your major repairs things like
the roof or the HVAC major things like that
they’re gonna cost you a lot of money you don’t want to just go down ten years
down the road and all of a sudden you you get hit with a major roof expense
and then you lose all the cashflow you’ve been making up until then you
want to budget that into your cash flow so that it doesn’t come as a surprise
down the road so I’m gonna budget another seven percent for my capital
expenditures now typically in my area and most areas utilities are gonna be on
the tenant to pay okay so for me that includes water sewer electrical gas
trash is paid by the city in my area lawn care and all that is gonna be on
the tenant as well there are no HOAs for this property so when that said all
these utility costs are gonna typically fall on the tenants responsibility but
if you get a multi-family two to four unit property or even above that then
lawn care is now gonna be the responsibility of the landlord and water
if you haven’t sub-meter drew water meters then that is gonna be a
responsibility of the landlord unless you have submitted it and gotten every
single person a water meter or every single unit a water meter then at that
point you can put it back on your tenants now for down payment let’s let’s
figure these last costs out right now downpayment you have to put down a
minimum of 20% down on a single-family investment property so that puts us at
$19,400 down closing costs on a
$97,000 property I’m gonna say about $4,500 there inspection I’m gonna do 350
rehab on a 1,400 square foot home cosmetic renovation I’m gonna say about
20 grand maybe 21 grand for this rehab okay so that puts us at about a four
point five nine percent cash on cash return so but how do we calculate that
right so I just I just got this automatic number that popped up but I
want to show you how I did it okay all you do to figure out your cash on cash
return is you take your annual cash flow number this is what you make in cash
flow per year two thousand seventy six and you divide it by your total all-in
cost that’s your forty five thousand two hundred fifty dollars because that’s
totaling your down payment closing costs inspection and Rehab all together that’s
your total money that you’re putting into the property okay and when you take
two thousand seventy six divided by forty five thousand two fifty you get
four point five nine percent so the question is is that a good deal well for
me I would say it’s not I like to aim for typically at least a 10% return on
investment or above with the exception being that if I do find a property
that’s in a very promising area with lots of upside to it may be lots of done
gentrification going on in the area very up-and-coming area for whatever reason
then I may be willing to go down to an 8% return on investment on that property
but the reason why four point five nine percent isn’t gonna cut it for me is
because it’s not hard to get six to eight percent returns on the stock
market and that’s a much more passive way of making money than real estate so
if I could make that much money on stocks then a four point five nine
percent I don’t know that it’s gonna be worth my time at that point to do that
so anyways hopefully this has made it a lot more helpful breaking this down for
you guys and maybe you guys get a better understanding of how to run the numbers
now on a rental property but let me know if you have any questions in the comment
below in conclusion whenever you’re analyzing a potential rental property
remember that it all starts with the cash flow and cash on cash return other
things you want to look into when you’re analyzing a deal is what kind of
opportunity there is for appreciation are you overpaying for the property
which you can actually have your agent run a CMA or comparative market analysis
to get an idea of this and most importantly understand what the property
location is like because while you can change how our property looks like on
the inside and out you can’t do anything about the location it’s in I also
attached a free spreadsheet link in the description below that you can use to
calculate your cash flow numbers with with that said I hope you enjoyed today’s
video these days I’m posting new videos like this one every Friday so be sure to
check those out and stay connected to the channel if you did find some value
in today’s video go ahead and do me a favor and smash that like button hit the
subscribe button below and let me know what your biggest takeaway was in the
comments section also if you want to stay up to date with me follow me on my
Instagram page at the out-of-state investor thanks again for watching and
I’ll see you on the next one


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