Beginner Calculator Help!

[Erik E.]

Hey everyone!  I'm getting back into learning about real estate investing and I am having trouble being confident with using the rental property calculator.  I have watched a bunch of the webinars, especially about the property analysis, but I'm still hesitant on knowing which exact numbers to be putting in, or which ends of those given estimate ranges I should go with.  I guess I'm looking for resources that expand upon the little question marks next to the categories.  Since I've heard that one small mistake could destroy a seemingly good deal, I need more knowledge on these numbers.  Could somebody give me some guidance on how to learn more about the different data that the rental property calculator is asking for?

Thanks everyone,

Erik

[Michael Le]

Remember that positive cash flow is not the end-all-be-all. While negative cash flow is a deal breaker, positive cash flow doesn't necessarily mean it's a good deal. If you put 90% down on a house, it will (hopefully) cash flow. That doesn't mean it is a good deal because if the cash flow is too low, you could have made better use of your money elsewhere. That's when you have to consider other numbers, like cash on cash return.

Imagine a $100k house. If you have to put down $90k to get $100 cash flow a month, that only comes out to 1.3% return on your money ($1200/$90,000). But if you put down 20% ($20k) and the property cash flows $300 a month, you return is now 18% ($3600/$20,000). Very nice. Both of them are cash flow positive, but the former is obviously a bad deal.

As for anything that stands out in a listing, you really have to run the numbers. You will get the general range of numbers you will need to make it work after you've done it many times. If the house or price/unit is $100k but the rent for the area is only $500/m then quick calculations tell you 'No'. Using the 50% rule as a quick shortcut, you will see that half of the gross monthly rent of $500 should be reserved purely for expenses. So that leaves you $250/m for debt service. With the 50% rule, debt service should be just the PI (principal & interest) portion. Even so, $250/m doesn't leave you much to pay for the mortgage. You would have to put down more than 50% to make it cash flow.

Granted the 50% rule is very broad rule and you need the real numbers to see if something is a deal or not. Sometimes these rules can make you skip on properties that could work or buy properties where it won't. So eventually you have to plug in real numbers. But if it's not close I won't even bother to go that far.