How I quickly analyze 1-4 Unit rental properties

[Matt Jones]

I thought it might be interesting to cover how I quickly analyze new properties that come on the market to determine their potential as rental property.  I'd love feedback from other BP members on how you do your basic analysis in order to pick the properties that you want to dig into further so please comment below!

Too many properties hit the market each day to analyze them all, some are obviously not good rental prospects but many look borderline until you run the numbers. My first eye test on these potential rental properties: is the monthly rent 1.4%(I use this number because it typically represents the minimum needed to achieve an acceptable rate of return) or greater of the price/value? I usually have an idea what a property will rent for based on size and location since I am a real estate agent and landlord already but there are plenty of ways to find out what a property might rent for if you don't know. If I get serious about a property I will do these anyway but a few options are check rentometer.com, search for rentals on Zillow or trulia in that area with the same number of bedrooms and bathrooms, check craigslist and check the website for 1 or 2 large local property management companies. When you are comfortable that you have enough rent to support further investigation the next step is to quickly figure your potential monthly cashflow based on rent and estimated expenses. I deduct 10% of the monthly rent for capital expenditures(initially this includes repairs and durable items), 10% for property management and 10% for vacancy. From the remaining 70% of monthly rent I deduct the monthly mortgage payment PITI(Principle, Interest, Taxes & Insurance) to determine the monthly cash flow. Finally, I multiply the monthly cash flow by 12 and then divide it by my expected initial investment. That's a lot of words to describe what takes me very little time to complete. See my example below.

Price: 75,000

Estimated Monthly Rent: $1100 

After deducting for PM, CapEx and Vac = ($1100 x .7) $770

Est Mortgage with 25% down = $515

*You'll need to figure your own based on cost of money, and taxes and insurance for your area!

Monthly cash flow: ($770 - $515) $255

Yearly Cash Flow: ($255 x 12) $3060

Cash needed to acquire property: $21,500(25% down + 3% closing costs)

Potential Cash on Cash Return: 14.2%

*I invest for cashflow so I use cash on cash return as my primary motivator.  I consider the tax, advantages, property appreciation and mortgage pay down as important but not my primary deciding factor

When the cash on cash returns meets my minimum acceptable return I go see the property and run the numbers in depth.  Usually, I'm going to want to buy the property at a discount and I typically want to get the property in shape to rent at a premium so the real numbers will always be different but this is a quick and easy starting point for me.  After running the numbers at a few different price points much of this is memorized and can be done in your head.

How do you perform your initial rental analysis? 

Where do you agree or disagree with how I start the process?

[Dale Forney]

Thanks for sharing, Matt. Sounds like we have some things in common. I just recently affiliated with a brokerage, am a currently a landlord of several props, but now also in pursuit of more for med to long term buy and hold. I appreciate your breakdown and calculatons. How does your approach differ for SFH props u pursue? Thanks!