BiggerPockets Rental Calculator Analysis

[Terrance Harrington]

Hi, I’m a newbie who is thinking about upgrading to the pro membership in order to help with my real estate investing business. I’ve attended a few webinars and recently toyed around with the rental property analysis calculator. I’m trying to obtain a level of fluency to be able to interpret what I’m seeing, however I’m having a problem figuring out some of the formulas of the calculator and is wondering if someone could help decipher the formulas?

Monthly Cash Flow = Income – Expenses

Pro Froma Cap Rate = ?

Purchase Cap Rate = ?

Debt Coverage Ration =?

ARV based on Cap Rate =?

Income-Expense Ration (2% Rule) =?

Thanks in advance!

[Mike Sedlacek]

Monthly Cash Flow = Gross  Monthly Rental Income - Operating Expenses (utilities, insurance, taxes, Management fees, water & Sewer, etc.)

Pro Forma Cap Rate is projected year to year with increases in rent and expenses.

Purchase Cap Rate = NOI / Purchase Price which should be around 8% to 10% or so.

NOI is Net Operating Income or your Yearly Cash Flow as above times 12 months.

Debt Coverage Ratio = Annual NOI / Annual Debt Service or your annual mortgage payments.

Lets say your yearly NOI is $40,000 and your monthly mortgage payments are $2,700 x 12 = $32,400. DCR = $40,000 / $32,400 = 1.24 which means the project is bringing in 24% more in cash to make the mortgage payments.

AVR is the After Repair Value of the property which should be more than you bought it for.

AVR based on cap rate would be NOI / Cap Rate. $40,000 / 10% = $400,000 AVR

Then work backwards to get to the offer price. Say $400,000 less profit of $40,000 less repair costs of $70,000 less closing costs of 1% ($4,000) = $286,000 would be the offer price.

The income and expense ratio , lets say you collect $1000 monthly rent and the 50% ratio would state that $500 would go towards monthly expenses.

The 2% rule says that if you purchase a property for $100,000 then the monthly rent should be $2,000. My experience has been 1.25% of the purchase price on average.

Hopefully this all helps you.