I've noticed some investors having some issues efficiently and accurately analyzing rental properties. I thought I would provide a reference below to help out some investors who are struggling to determine what's a good rental deal. This information will be based upon buying a rental property in cash or hard money and refinancing out of the property via traditional lending (BRRRR Strategy)
Initial Phase Data Analysis
Purchase Price
Rehab Cost
Rent Amount
After Repair Value (ARV)
Once you understand these data points then you'll have an understanding of how much equity you'll have into the home immediately upon completing your renovation.
Next Phase Data Analysis
Determine your Net Operating Income
Net Operating Income = Annual Income - Annual Expense
Typical Investor Expenses (Varies depending upon the investor): Vacancy, Taxes, Property Insurance, Property Management, Property Maintenance, Cap Ex (Capital Expenditures), etc.
Once you have budgeted for these expenses, you'll now understand what your NOI for this property is which gives you a much better indicator of how much money you're actually making.
Next Phase Data Analysis
Visit your financing terms. This obviously can vary from investor to investor.
Cash Investors: Purchase Price + Acquisition Closing Cost + Rehab Cost
Hard Money Investors: Down Payment + Acquisitions Closing Cost + Origination + HM Fees + Interest During Hold Period
This phase of analysis would allow you as the investor to understand how much money you have into the deal prior to your Cash Out Refinance.
Next Phase Data Analysis
Refinance Terms:
ARV Loan Amount: Lender's in today's market are lending anywhere between 70-80% of ARV
Term: 30 year Interest Rate: Under 4% with good credit and debt/income (assuming using a conventional loan)
This data will allow you to understand your Annual Debt Service or the amount you're obligated to pay to your lender annually.
Next Phase Data Analysis
After deducting the refinance fees from the loan amount, you'll understand what your Total Cash Out Amount from your lender will be. After learning what your total cash out will be, you subtract this amount from your total cash into the deal prior to the refi. This number will provide you with an understanding of how much cash you'll have into the deal after the refinance.
Last Phase Data Analysis
Go back to your NOI and subtract your debt service. This final number will give you your TRUE CASH FLOW!!! True Cash Flow is the amount of money you make monthly from a property after every single expense has been accounted.
P.S.
Saavy investors look at the following data points as the most important when determining whether or not to invest in a deal:
- 1. Cash on Cash Return = Monthly Cash Flow / How much cash in the deal
- 2. DCR (Debt Coverage Ratio) = For every dollar that you take to pay your mortgage, you make this number back in return (formula is Annual Rent / (Debt Service + Insurance + Property Taxes + Property Insurance + HOA if applicable)
- 3. Cap Rate = Net Operating Income (NOI) / (Purchase Price + Rehab + Acquisition Closing Costs)
IF YOU HAVE ANY QUESTIONS OR DISCREPANCIES PERTAINING TO THIS ANALYSIS, PLEASE REACH OUT TO ME! ALWAYS LOOKING TO CONNECT WITH INVESTORS.
