How to practice the math for real estate investment?

Question

Hello! I'm hoping to purchase a rental property in the next year. I read the Book on Rental Property Investing and am reading various articles on the matter. I'm ready to start practicing the math associated with analyzing properties. How do you suggest I go about doing this? Should I just start finding properties on Redfin and performing the calculations called out in the Book on Rental Property investing? I don't know if it matters but I will need to look at properties that are outside of where I live since San Diego is very expensive.

Thank you all in advance!

Nathan Gesner · Answer

Look for a market that is generally good for investors (fair laws, responsive justice system, healthy rent rates). Then narrow in on a local market that is growing. Then narrow it down to neighborhoods with strong schools because that's where good families live and they try to stay put until kids are graduated.

Get your math formulas written down. Build a simple spreadsheet. Practice plugging in the numbers. After doing a couple dozen houses, you'll start to get an idea of what it takes for a property to work or not, and you can "eyeball" a property and tell right away whether it's worth investigating further. This allows you to analyze more properties quickly.

Joe Villeneuve · Answer

Yes.

Tim Herman · Answer

@David Yee You can use BP calculators 5 times for free, or there are spreadsheets already built in the files section of BP that you can download. The key is to know what numbers to put into the spreadsheet. Almost all use a percentage of gross rents. That can either be high or low based on the gross rents. If you use 5% as a repair budget for a $500 or $1500 property. You will be low on the $500 property and pretty close on the $1500 property.

If you call a property manager and ask what their vacancy is they may say 3%. That is the equivalent of your tenant staying 33 1/3 months. Banks will underwrite at 5%. You have to anticipate you might have to evict someone or they thrash the rental and it takes a couple of months to get it in shape to rent again.

A simple repair budget is cost to rehab plus the cost of service calls over a set amount of time. Let's use 5% or 1 turnover every 20 months. Assume $1000 to do a major turn(new paint, refresh landscaping, deep clean, etc). I figure 1 service call per year at $150. For this example I will use 1 1/2 calls for the 20 months.  $1250/20 months =$62.50. Let's say you can do touchups until 5 years and it costs you $500 per touch up. Have 2 touchups and 1 major plus 5 service calls. $1000+$1000+$650=$2650/60=$44.17.

A capex budget is done the same way. Every item has a lifespan. There are capex budgets in the files section. A very comprehensive one by @ Sam Tato. One item in a budget is floors. Go to your favorite flooring store and ask for the commercial warranty. Most will be 10 years or less. My area it costs me $6 sf to replaces floors with lvp. Assume 1000 sf of flooring. $6000/120 months lifespan=$50 per month for 1 item, Have to account for roof(25 years), appliances(12 years), hot water heater(10 years)Hvac(20 years), etc.

When you know what the meaning of your numbers helps make the decisions easier.

David Yee · Answer

Wow! Thank you for the detailed answer. I'm going to download spreadsheets tonight!

Chris Seveney · Answer

look into a class like getrefm - great financing classes they have.

David Yee · Answer

Thank you!

David Yee · Answer

This is super helpful! Thank you

How to practice the math for real estate investment?

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