What data do I need ? How to do the math?

Question

Hello Everyone! I am starting my real estate investment journey. I don’t have much knowledge or any property...yet. I currently have about 60k liquid, no debt, 800 credit and would like to buy in 2020. However, I don’t have any knowledge on how to know if I am getting a good deal, what to look for, or what data I need to have on the properties. I’m a newb!

Any advice would help. Thank you !

Scott Trench · Answer

Hello! I love it - this is a pivotal moment in every new investor's journey; defining what you want in great detail. Put differently, defining what a GREAT DEAL means to you.

Here's a construct for how to go about this:

* Location

* Cash Flow

* Property Type

* Property Condition

* Comps

Location: Decide on a market, neighborhoods within that market, and specific hyper-local factors.

An ideal market for many new investors might be one within an hour's drive of home, a place that offers a reasonable blend of long-term appreciation potential in the investor's opinion, while also offering acceptable cash flow opportunities on average.

An ideal neighborhood within that market is one that offers the best of both worlds for appreciation and cash flow relative to the market you've chosen. A great way to get a feel for this is to take local investors and real estate agents who are active in your market out for coffee. Ask them where the "path of progress" is in that market, and why. Take what you learn and drive the neighborhoods after you learn about them, validate or invalidate what others are saying for yourself, and then continue networking and honing those assumptions.

Hyper-local factors include things like whether the property is on a busy street, next to a gas station or loud commercial building. I like properties in C neighborhoods next to elementary schools, for example, but not ones next to high schools and the foot traffic that comes with that. These are things you will pick up by driving the neighborhoods you select.

Cash Flow: Cash flow is:

Gross Rent - learn to estimate this by looking at local rental listings, talking with local investors, and networking with real estate agents

Less PITI (Principal, Interest, Taxes, and Insurance) - you can often get most of this from your lender and insurance broker.

Less Vacancy - Ask local landlords and look up statistics on HUD. Be wary of markets with greater than 8-10% average vacancy.

Less CapEx and Maintenance - This is tricky, go research these and look up some blog posts on here about this. As a rule of thumb, I like to allocate about $250 per month to this ($3000 per year), knowing that most months I do not experience the any repairs, but once every now and then I have to devote a few thousand to a renovation or upgrade.

Less Property Management - This is usually 10% - 14% of gross rents, plus leasing fees.

Other expenses: While the above are the expenses universal to all landlords, sometimes landlords can be on the hook for utilities (if they don't have separately metered units, or pass these on to the tenant in the form of a utility bill), HOAs (I avoid these entirely, but many landlords do well working with HOAs), and more.

Property Type - Most new investors deal with single-family, duplex, triplex, and quadplex properties. This is because it is relatively easy to get Fannie Mae 30-year fixed rate financing on them. It's harder to get a great loan on other types of property, but not impossible. Most new investors are looking for long-term buy and hold properties.

Condition - Most new investors purchase "habitable" properties. Again, if a property is not "habitable", then it becomes difficult to get conventional financing insured by Fannie Mae. Habitable has a spectrum from "pristine" to "needs TLC". TLC is "Tender Love and Care" and is a term used to describe everything from a property that needs a bit of cleanup and paint, to a completely wrecked interior. You'll have to decide for yourself where along that spectrum your capacity and desire to add value lies. Farther towards "wrecked" means that you might be able to create more value, but also that you assume potentially more risk.

Comps - A "good" deal is one that you buy that meets your criteria above, but also is at or below the price of similar properties being sold in your area. For example, if you live in a market with $400,000 quadplexes that rent for $5,000 per month with great appreciation prospects, please call me and let me know where that it!

However, if you buy your quadplex for $500,000, you are paying more than the going rate for that quadplex in your market. Therefore, you are not getting a good deal.

A "good" deal is a deal that meets your above criteria, and that is purchased at a discount relative to other local properties with similar characteristics in your market.

Art Perkitny · Answer

@Robin Morales I suggest starting by looking at market data to determine where you will be investing.

In todays world, investors can benefit greatly from the plethora of demographic and economic data available to them.

Below you will find a list of datasets, that I've found in my research, which will provide you with a number of key performance indicators (KPIs) that you can use to evaluate real estate markets at all levels.

Census Bureau: American Community Survey (ACS)

The ACS was launched in 2005 and is administered every year by the Census Bureau to roughly three and a half million households in the USA. This dataset contains over 18,000 data points, which are tabulated at the state, MSA, county, city, zip, and block level.

This survey contains hundreds of KPIs that investors should use when searching for new markets to invest into. Here is a list of a few that I find to be of most value:

• Population Total
• Home Values
• Household Incomes
• Poverty Rate
• Population Age
• Rental Vacancy Rate*
• Homeowner Vacancy Rate*
• Educational Attainment Rate (High School/GED & Bachelors)
• Number of Housing Unit
• Rent to Income Ratio*
• Rent to Price Ratio*
• Population on SNAPS (supplemental nutrition assistance program) percentage
• Property Tax Rate*
• Median Age of Buildings
• Number of Structures by Units (SFR, Duplex, Triplex, Quadplex, etc...)
• Median Rents by Number of Bedrooms
• Population Change (Births, Deaths, In-Migrations, Immigrants)

*note that some of the metrics are composites that are computed by comparing two or more variables from the ACS

A number of the variables above can also be broken up into cohorts, which will give you even more insight into how an area is doing. For example, an area may show a low median income, however when looking at the cohorts, it may show a bimodal distribution of income at both the lower and higher end. This could be an indicator of an area that is going thought the early stages of gentrification.

I'd also encourage you to look at the deltas, or change, for some of the indicators mentioned above. This will better help you get an understanding of not just where market is today, but also where it may be heading. You wouldn't want to buy into an area that is declining rapidly where the tenant quality is decreasing along with the area.

Bureau of Labor Statistics: Current Employment Statistics (CES)

The Current Employment Statistics (CES) program produces detailed industry estimates of employment, hours, and earnings of workers on payrolls every month. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites.

The CES is the gold standard when it comes to analyzing the job growth of a market. As an investor you will want to look at the number of jobs add/removed within a market. In addition to this figure, the CES provides more granular data for jobs tabulated using the North American Industry Classification System (NAICS). This system allows you to get a very detailed picture of how the local job market is composed. You will want to avoid markets where a single industry dominates the local economy in the number of jobs since these kinds of markets a incredibly susceptible to swings in the market.

Census Bureau: Building Permits Survey (BPS)

The purpose of the Building Permits Survey (BPS) is to provide national, state, and local statistics on the number and valuation of new privately-owned housing units authorized by building permits in the United States. The Building Permits Survey covers all "permit-issuing places," which are jurisdictions that issue building or zoning permits. About half of the permit-issuing places in the United States are surveyed monthly. The remainder of places are surveyed annually.

Using data from the BPS, investors can get an idea of the supply and demand dynamics within their market. Coupled with migration data from the ACS, this can be a very powerful dataset to use when attempting to predict future housing prices, vacancy, and absorption rates.

Federal Bureau of Investigation: Uniform Crime Reporting (UCR)

The Uniform Crime Reporting (UCR) program compiles official data on crime in the United States, published by the Federal Bureau of Investigation (FBI). UCR is a nationwide, cooperative statistical effort of nearly 18,000 city, university and college, county, state, tribal, and federal law enforcement agencies voluntarily reporting data on crimes brought to their attention. UCR data is published annually by the FBI.

UCR data is reported as either violent or property crime, which then break down further into eight possible sub-crime categories. Investors will want to ensure that the areas they are investing into have low rates of crime, or are at the very least improving over time.

Consumer Financial Protection Bureau: Home Mortgage Disclosure Act (HMDA)

The Home Mortgage Disclosure Act (HMDA) requires many financial institutions to maintain, report, and publicly disclose loan-level information about mortgages. HMDA data is the most comprehensive source of publicly available information on the U.S. mortgage market. HMDA data is released annually.

Investors can look at the types of loans being given, weather the property is used a primary residence or investment, and the demographic information of the borrower. It's possible to also tabulate the data by the type of property (residential or commercial). This data is tabulated at the census tract level, which allows for a tremendous about of granularity when conducting market research. Investors should use this data to identify areas where other investors are buying as well as to get a better understanding of the demographics of buyers in the area.

Census Bureau: Decennial Census

This is the census that most of us are familiar with. It has been administered to all households in the country every decade since 1970.

Investors should use this data set when more granularity is desired than what the ACS offers. However, one should be leery of the data once a few years have passed since the census was taken since demographics can change rather quickly in small areas.

Honorable Mentions:

The datasets below are ones that I have come across in my research, but have not yet had the chance to fully go through. Nonetheless, they will likely provide investors with even more actionable data.

• Internal Revenue Service: Statistics of Income Migration Data (SoI Migration)
• Census Bureau: Value of Construction Put in Place Survey (VIP)
• Census Bureau: Current Population Survey - (CPS)
• Department of Housing and Urban Development (HUD): Survey of Construction (SoC)
• Census Bureau: Survey of Market Absorption of New Multifamily Units (SOMA)

Remember that real estate is hyperlocal and it's important not only to find a market that posses mostly positive indicators but also a sub-market that has the same positive characteristics. Locations with poor indicators will attract poor tenants and the quality of the tenant base is often more important than property you select itself.

I think it's more important than ever for investors to look at the data as we reach the end of the longest bull market in US history. Investors that allocate into places with good market indicators will fare much better in the looming recession and will  avoid making an extremely costly mistake.

By looking at the data you will be leaps and bounds ahead of the competition.

Let me know if you have any other questions, hope this helps!

Erik W. · Answer

@Robin Morales, I'll give you the same advice I've given a half dozen other newbies who have posted the same question. Fyi, it gets asked here on almost a weekly basis, so I also recommend doing a search on keywords like "starting out", "newbie", "first steps" and see what you find.  Should get a treasure trove!

Anyway, the first step is establish you WHY.  Why are you getting ready to do this?  Why do you want to invest in real estate?  Freedom?  To have options?  Build wealth?  Give generously?  Work for yourself?  Enjoy the "finer things in life?"

Those may all sound somewhat synonymous, but I assure you they are quite different.

Let me give one example: "Work for myself."

Okay, lots of people work for themselves in real estate, but what do they do?

A lot of newbie investors make the mistake of not finding out their WHY early on.  They just read some blog or listen to a podcast and think, "I'm going to start my real estate journey and become rich."  They don't budget for things like Capital Expenses, maintenance or management, and buy the first thing they see where the rent covers all (or most of) the mortgage payment because hey, that's "Cash flow!"  And they figure they'll self-manage and take care of the maintenance, basically failing to count about 15-20% of the expenses, which they end up doing for no pay using their own time and labor.

Why is that important?

Because if your goal is freedom, the last thing you want to do is be swapping out toilets on Thanksgiving or Christmas Eve when your tenant's kid flushes a toy down the commode.  You want to hire that done.  Or maybe you don't.  Maybe your definition of "work for myself" includes jack-of-all-trades, handyman, property manager, etc.  I don't know.  Only you will know after you sit down and figure out your WHY.

So, there's your first task.  Figure out your WHY.  Btw, it's okay to refine, modify, or totally change your WHY down the road after you get into the biz.  But be sure to have one so you can measure the results of your actions against it.  If you choose "freedom", then you should stop every month or so and ask yourself, "Is what I'm doing day in and day out increasing or decreasing my freedom?  Or am I temporarily decreasing my freedom in the beginning to achieve a greater freedom later?"

Many questions.  You'll need to allocate time and energy to figure out the answers.  Don't do what most people say and "just jump in" before finding your WHY.  It takes a lot more time to undo a bad decision than to think it over and make the correct one.  Some of us spent a half decade recovering from failing to find our WHY.  Ask me how I know!  (*wink)

Good luck.

P.S.  You have no debt: congratulations!  Unfortunately, if you want to maintain that sweet 800 credit score, you're going to have to borrow money.  As Dave Ramsey says, "A FICO score is an 'I love debt' score."  Money, net worth, income....none of those things maintain a FICO score.  I'm actually kind of jealous of you.  My goal is to one day have a 0 FICO score...indeterminable...because I am debt free.  Lots of people invest in real estate with cash only.  There are lots of ways to do it.  Don't accept debt as a requirement: it is simply one path, and it may not always be the best.

Chris Coleman · Answer

@Robin Morales educate, educate, educate!  Before you jump in and start a purchase, take time to learn all you can.  Here on BiggerPockets is a great, and probably the best place to start.  Read the Forum posts, read the Blogs, listen to podcasts, YouTube, and spend a little time just soaking up knowledge and other peoples' experience (and mistakes).

Commit to studying a little every day and I assure you that in no time, by the end of this month, you will know a lot more than you do know and feel much more confident.

Then you take your first step by asking yourself, what type of real estate investing do you want to start with? Single-family buy and hold, BRRRR method, fix and flip, turnkey, multifamily, mobile homes, etc???  Do enough studying and learning that you can answer that question for yourself.  Then move on to the next step.

Jon Reed · Answer

Have you purchased any real estate books and started reading? Have you hopped on google and just searched "Real Estate Investing"? Do you listen to any of the biggerpockets podcasts?

There is TONS of free information out there to get started. You just have to start consuming it.

Robin Morales · Answer

Wow I cant thank you all enough!! I appreciate all of your help! i have take all of your information and written it down. I love this forum!

Lauren Juarez · Answer

I would recommend attending a few (or many) BiggerPockets webinars! Those really helped me learn how to analyze properties.

Ron Rohrssen · Answer

Agree totally with @Chris Coleman and @Jon Reed and others. Ideally you'd put some effort into understanding the scope of possibilities ahead of posting a wide open question here. Invest some time researching several different ways that you can invest in RE.

@Robin Morales you're in a great starting position. Don't rush into it.

BP has great resources in the podcasts and weekly webinars. I'd recommend "The Book on Investing in Real Estate with No (and Low) Money Down" by  Brandon Turner (https://www.biggerpockets.com/...) as a way to get a birds-eye view on lots of terminology and several strategies. (Hint: It isn't just buy a bargain on the MLS, rent it and hold on for 20 years.)

Learn to use the calculators on BP. That will help you think differently about prospective properties in your target area.

Mark Allen Kenny · Answer

@Robin Morales books are great but the best way to learn is to start looking at properties and starting doing the math.  Use the Calculator Tools on this site to get started.  Look at A LOT of deals before making an offer.  I would advise choosing 1 or 2 markets and really getting to know then inside and out.  If you decide not to invest where you live, it's really important to know the different neighborhoods and price points in the market where you'll eventually buy.  Let me know if I can help with anything.

Theresa Harris · Answer

@Robin Morales  Others have posted most of the important questions you need to ask yourself.  There is never a perfect option or answer, but you need to make sure you are honest when answering the questions.  Many people starting out either get a single family house or a duplex.  If you are fine moving, you can live in half of the duplex to start with which will allow you to put down less money.  If you find one where half needs a bit of work (cosmetic, not a gut rehab), move into that and fix it up slowly over the period of a year.

Don't overextend yourself financially, it is fine to start small to get your feet wet.

What data do I need ? How to do the math?

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