18 and no clue how to start

[Lucas Wolf]

Hello, I am Lucas Wolf, 18, i’ve been watching biggerpockets for a year now just absorbing knowledge, I have low capital but my plan is to get enough capital to get one Section 8 Property as proof of concept to bring to an investor and scale from that, Im struggling to figure out how to “crunch” numbers on properties and where to even look for the correct deals, it feels like Im just throwing darts blind folded, the main point is that I just need help knowing what to look for in a property EX. Pricing, location, etc. anything helps thank you!

[Randall Alan]

Quote from @Lucas Wolf:

Hello, I am Lucas Wolf, 18, i’ve been watching biggerpockets for a year now just absorbing knowledge, I have low capital but my plan is to get enough capital to get one Section 8 Property as proof of concept to bring to an investor and scale from that, Im struggling to figure out how to “crunch” numbers on properties and where to even look for the correct deals, it feels like Im just throwing darts blind folded, the main point is that I just need help knowing what to look for in a property EX. Pricing, location, etc. anything helps thank you!

@Lucas Wolf

Crunching the numbers is as simple as “What’s left over for me after I pay the bills.”

You need to cover:

The mortgage (made up of Principle, Interest, Property Taxes, Property Insurance - those four being known in the industry by the acronym PITI).

Repairs - this is usually done through a maintenance reserve you set aside each month.  We use $100-125/door/month that we transfer to its own account that we pay for repairs with. 

Beyond that, just getting started you will want to have some cash reserves just in case something big breaks right off the bat… think new AC that might cost $5,000 or something like that.  Hopefully it doesn’t happen, but you never know.

As for where you find all these numbers, obviously the price of the house determines the loan amount. For a straight up investment property, you had to be able to put about 20% down. So you subtract the 20% off of your property cost to figure out your loan amount. From there you need to know what your interest rate is on your money. You can easily call a mortgage broker and ask them what the current rates are at. Once you have your principal amount and your mortgage rate, you can Google “mortgage calculator” and enter those figures into one of the calculators and it will give you your payments based on principle and interest. Taxes you look up on your county’s property tax website for the specific address. Keep in mind that your taxes will reset after the first year to the price you paid for the property. So if the previous buyer paid $100,000 for the property, but you are paying  $200,000 for the property, your taxes in about a year will be based on your payment amount, and not his. But when they go to calculate your mortgage payment, they will use his taxes initially.

But when they go to calculate your mortgage payment, they will use his taxes initially.

Insurance can also be quoted by an insurance broker. You can call up any insurance broker and they will give you a quote on a particular house. You don’t want to bug them continuously, and eventually you will figure out what an average insurance price is for a typically priced house you were looking for.  In Florida with hurricane insurance, ours are closer to $1500-$2000/ year for your typical $150,000-200,000 house for instance.

At that point, it’s simply a math problem of starting with what you can rent the property per month, minus all your expenses listed above, leaving you with the remainder as (hopefully) a profit.

If your number is negative after all that, it is obviously not a good investment property at the current interest rates. Much of what you find right now may fall into that category, because the federal reserve has (effectively) raised interest rates by double what they were a couple of years ago - technically they don’t set mortgage rates, but their rates ultimately influence what mortgage rates are (based on the 10 year treasury note). 

What do you want to do is systemize your search. Run several calculations. Based on what your typical rent is in your area, along with a low, medium, and high priced house. Quickly you will determine what price range your house has to be at for you to be able to cash flow on that house. Once you know this number, you literally don’t even have to run calculations until you get to something that fits the parameters you determined would work. Most houses you will be able to look at and say at X dollars for the house it won’t work for an investment property.  Ones that are closer or that demand higher rent, you will want to run your numbers and see how they work out.

Not all profit margins are equal. Real estate at this moment in time is actually quite challenging to find a deal that is worth it, which begs the question what is a good return on real estate.  I buy houses that are typically in the 800-1000 square-foot per unit range.  For me my personal number is $300 per month after all expenses and the maintenance reserve. If it doesn’t make that, I’m going to keep looking. This number will flex based on the size of a house, etc. but the overarching point would be that any property that makes $50-100 a month after those expenses isn’t worth it in my book.

I am telling my friends that they need to look at the alternate uses of their money and not just solely focus on real estate. With interest rates higher than they’ve been in 15 years, you need to compare investing in real estate against putting your money in a savings account and earning 5% on it. With the high price of real estate right now, the rates earned on savings are coming close to equaling the typical return that you people are finding on the average real estate deal across much of the country right now. 

For instance, a $200 per month profit margin on a $200,000 house that cost you $40,000 to buy, is giving you a 6% return on your money each year, before factoring in other losses, such as closing costs, vacancy, and any excessive repairs.  The savings account is returning 5% on your money and it is guaranteed 100% safe with no hassles that come with real estate.

We own 37 units across 25 properties - all purchased since 2018, and not one cash flowed less than $300/unit when purchased with loans in the 4-5% range.   Through rent appreciation, and selling some properties to pay off other mortgages we have pushed our average $/door monthly profit to over $650/door/month.  I don’t say this to brag, but rather to point out what is possible when you buy right, at interest rates that work well to make money.  You could draw the conclusion that right now is not the greatest time to be trying to buy real estate… and you would probably be right!  Real estate is cyclic and conditions will improve as rates drop.  Every dollar that moves out of the loan interest column moves directly over to your profit column as rates come down.  Real estate is not a short term game… you have to realize where you are at in the real estate cycle and do what the market tells you to do. For 95% of the country right now, real estate is telling investors to sit tight.  That’s not to say we aren’t always looking, as you should be as well. But realize that until rates and real estate prices recalibrate themselves, it’s a tough proposition right now to be investing in real estate. 

All the best,

Randy