How to analyze rental properties and work there numbers?

Question

I am always a little bit confused about how to work numbers in rental properties. I've read a lot of BP blogs and articles and I now know a little bit about it. There are so many ways and formula's and things like ROI, Cap rate, COC, etc. I know what they are and how to calculate them But it's a little confusing, I don't know which one to use any when to use. I also don't know how to calculate vacancy, and how much rent should I offer to tenants like how much should I rent a unit for or how much cash flow is this property gonna produce. So I really need help on how to analyze numbers on rental's so that I can decide which is a good investment and which is a bad one and then invest wisely, so I really need to know the economics of income property?

Kenneth Garrett · Answer

@Jasraj Singh

It depends on the type of property.  Let’s use a 3/2 SFH.  Don’t worry about the cap rate it’s only relative to 5 units or more.  Vacancy is based on your area.  If you are in a high demand rental area it’s going to be less.  I generally use 8% and adjust based on the area.  8% is one month out of a year it’s vacant.  If most tenants stay at least two years then reduce to 4%.   I wouldn’t go lower than that.  Most of my tenants stay 4-5 years.  If you put down 20% on a rental than CoC is your calculation.  If you put 20K down and the property cash flows $250 per month your CoC is 15%.  It’s your all cash in on a given investment minus cash flow.  In this case annual cash flow of $3000/$20,000 = 15% CoC.  ROI would be when you sell it.  Some investors use CoC/ROI as the same number for a cash flow property.  It’s your metric.

Calculating your rental market for how much rent to charge takes research.  Use Zillow, Trulia, Hot Pads, rentometer, etc to look at the competition compared to your property.  If you have access to the MLS use that as well.

Cash flow is rental income minus all expenses which includes mortgage, property taxes, insurance, vacancy, repairs, property management and capex.

Nathan Gesner · Answer

https://www.biggerpockets.com/blog/easily-analyzing-rental-properties-four-square-method

Brandon has a ton of videos on BP and YouTube, as well as a weekly podcast, where he walks you through the steps he uses to analyze a property. It's really not difficult and you'll have it down after a couple tries. If you want to get ahead, you need to put the effort in and practice.

There's no magic formula for calculating vacancy rates. You'll have to guess for a while until you build some experience. Most people estimate 10% vacancy rate. I manage 350 rentals and typically see less than 5% vacancy but it's sometimes higher and sometimes lower depending on the type of property. Experience will enable you to dial that in more accurately.

Jasraj Singh · Answer

Alright! Thanks for responding man!

appreciate it!

Jasraj Singh · Answer

That's great! thanks a lot for responding and recommending that article! I'll try my best!

Cameron Tope · Answer

Jasraj,

That's solid advice from @Nathan G..

Once you analyze numerous properties, and own a few, you'll have the knowledge to adjust from the "rules of thumb" and create your own way of analyzing rentals.

Don't worry about analyzing 100% accurately on your first property (cause it's almost impossible). It doesn't matter if your first property makes you a very low financial return, because the educational return is invaluable.

Best of luck!

Tom Wagner · Answer

Definitely agree that the framework Brandon uses to analyze deals is a great starting point! From there you have to identify what is important to **you**. For example, I have no interest in investing in a property that costs $50,000 and has a 20% cash-on-cash return. Sure, the COCR may be through the roof -- but it is not going to materially alter my life, and will prove more of a headache than the returns on worth.

Personally, I look at COCR but have a minimum threshold of annual cash flow per door.

Start with the videos Brandon puts out, continually reflect is what important to you then adjust your analysis accordingly!

Jasraj Singh · Answer

That's just great! But can a property manager or a broker give me information about rents in a market? or is there any other way I can get to know the rents in a market?

Thanks a lot man! thanks for explaining so precisely!

appreciate it!

How to analyze rental properties and work there numbers?

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