in this video i'm going to run the
numbers and analyze a two unit duplex
rental property so that by the end
you'll be able to confidently run the
numbers on a rental property for
yourself and for those of you who feel
like you're not good at math you're
intimidated by spreadsheets don't worry
i'm going to draw it out and make it
super simple so that anyone can do it
let's get started if we haven't met yet
my name is chad carson you can also call
me coach and this is a channel all about
helping you get out of the financial
grind so you can do more of what matters
this is also a channel about smashing
the like button so if you like this
topic please hit the like button to help
me spread the word on youtube so i'm
going to jump right in and show you a
real property a duplex that recently
sold right here near me in the upstate
of south carolina in a small city called
easley now i also want to show you the
real life timetable of how i would
analyze a property so if you think about
it most leads are going to come in
perhaps from a real estate agent maybe
you're out looking for properties
yourself driving for dollars or doing
one of the other tips that i give you
for finding good deals but the point is
you're going to get this lead in and you
probably have nine or ten other leads
that you're also looking at so time is
really important so on the first
analysis that i'm going to share with
you is more of a surface level analysis
and then later on i'll go more in depth
if that surface level looks pretty good
and there are three fundamental things
that i look at on every single deal
number one i look at the location of the
property number two i look at the
property itself and then number three i
run the numbers
so when you first get a lead on a
property you're probably going to look
at like the zillow listing or the mls
listing just to check out the basics
you're going to look at the pictures
you're going to read the description is
this a duplex how big is it that kind of
thing but very quickly in my analysis my
surface level analysis i'm going to look
at the location of the property now the
reason it's so important to me this is a
lot like gardening or farming you know
you could be a great gardener you could
have the best seeds in the world you
could take care of it but if you don't
have the right soil and the right
climate to plant that seed in none of
the other stuff matters it doesn't
matter how good you are at anything else
and real estate investing is a lot like
that with location so you want to look
at the location and kind of and the way
i do it is just starting off with google
maps so here in this case i'm going to
zoom out and take a look at this
property and there's some assumptions
that you have to have you know just
looking at google maps is not going to
help you if you haven't done your
homework on the big picture of this
location so this is an easily south
carolina happens to be in the upstate of
south carolina i know a little bit about
the industry and the jobs and the
economy of the upstate i've done my
homework on that knowing that it's a
manufacturing base there's a lot of
tourism as well but it's got a good
solid economy it's growing population
demographics are looking good greenville
south carolina's the biggest city in the
upstate and it's doing really well and
it's downtown this city easily happens
to be kind of a suburban city outside of
greenville about 15 miles outside of
town and a lot of people live here it's
more affordable and then they drive into
greenville and because of that they're
looking for more affordability people
want to have a house or a place they can
live in and rent or buy but they also
want a town center they want walkability
they want culture they want something
interesting and so this gets to me to
this property
one thing i noticed right off the bat is
a block or two from downtown so probably
within 10 seconds of getting this
listing i'd say oh that's interesting
you know downtown's happening there's
all these restaurants that it's taken
years for the downtown to really get
some vibrancy they have a doodle trail
which is like a biking walking trail is
it the name of it and it goes between
this town and another town nearby and
that's done pretty well there's these
silos here somebody remodeled an old
manufacturing kind of place that has
these cool silos and a brewery and
restaurants and food trucks and things
like that so all of that is within a
really close distance of this property
and as you can see it's kind of the edge
of a commercial area which could be bad
could be good but there's enough of a
residential influence you can see an
airbnb property here there's like a you
know kind of a commercial kind of
property right next door to it there's a
church kind of there so it's right on
the edge which i want to look a little
bit closer just to make sure there's no
big negatives when i zoom in on the lot
in the property but in general does it
have fertile soil for an investment yes
so like this is a green light for me
very quickly 10 seconds 15 seconds i'm
i'm gonna be interested in this and
wanted to go to the next step
so because i liked what i saw with the
location i go to my second criteria
which is the property itself and also
the lot where it's sitting and so i
literally want to zoom in on this
property and just again you can do this
with your google maps you do a street
view and i just want to look around and
understand as much as i can from my
computer here what it feels like in this
neighborhood and that's what's pretty
cool about google street view you can
get an idea you need to check the date
this is april 2019 so not quite up to
date you know this is three years old a
lot of things can change in three years
but you can see like the rough lay of
the land what's here across the street
are some residential type properties you
know is this a busy road how many does
it look like a lot of cars are coming by
there's no sidewalk which is kind of a
negative for me you know not having
walkability just taking some notes on
that you know what's this property look
like next door it's a commercial
property so it worries me a little bit
but i see there's you know there's some
grassy area in between i want to check
that out in person to see what it's like
now and see if anybody's built anything
there
you know kind of commercial trucks i
want to just take a note of that when i
go out to the property in person how
noisy is this is this you know this
looks like you know work trucks but it
was a you know something really loud or
a nuisance or you know those would be
things that would affect your ability to
rent or sell the property but in general
you know nothing's super scary there's a
sidewalk across the street
i also want to look at the lot itself
and by the way if you want to know like
a list of these kind of things i
actually have a free checklist as a deal
worksheet is a two-page worksheet that
i've used for years when i analyze
properties and you can get this for free
as part of my real estate investor
toolkit i'll have a link to that in the
video description and also above me here
but i have a list of things that in the
past have been problems for me with
properties on this surface level kind of
analysis so with the lot itself for
example is it unusually close to the
road
is there no backyard or extremely small
backyard is there a major slope down to
the house so let's go back and look at
the
street view this is kind of sitting up
off the road but what if it were a big
hill going down to the house where does
the water go from the property we're in
an area that rains a lot and so water is
always a big issue for maintenance for
those kind of problems and you can't
change that you can't like lift the
house up and re-grade the house without
a major expense so those are the kinds
of things check that checklist out that
i look at on the surface level again
you're going to do this in person once
you get out there but you're just trying
to look for any red flags that would say
hey there's like four or five red flags
i think i'm going to pass on this one or
i need to really discount the price
because there's a lot of problems with
the property but so far i don't see any
big red flags brick property i like that
i like the low maintenance of brick i
like the way the lot's sitting don't see
any big other problems i'm going to zoom
out again just to see like the the
backyard and things like that
it's got a little small backyard and has
a little you know kind of fenced in
backyard so no no issues there because
for an apartment that's probably going
to be enough and desirable enough but
that's the type of process i go through
step number two the property itself now
i'm going to look at some of the surface
level numbers
so now that i'm okay and i don't see any
red flags with the property in the lot
itself and i like the general location i
might just do a general very quick
analysis on the surface level of the
price of the property is it lower than
normal is it about average or is it way
above the general price of the property
and you can do this a lot just in your
head by knowing the background
information for your market you should
be studying it over and over again every
day you can look at things like what's
the median home value for properties in
your area in this case easily south
carolina's 275 000. now that's for all
properties residential that's for houses
as well this is a duplex which is a
little bit different animal but you use
that kind of as a general rule so we're
below what the median house price is you
can also look at the maps i like looking
at maps nearby specifically like that
that neighborhood so you can see what's
happening nearby and i just did a little
filter properties that have sold on
zillow in the last 90 days i filtered it
to houses and townhouses and multi-unit
properties there weren't a lot of
multi-unit properties around here mainly
single-family houses and then i just
zoom in on the neighborhood this
property is right around here you can
see 236 000 for a very relatively new
house that's this one right here you can
also see this one's a four bedroom three
bath 2000 square foot probably a
remodeled property you can go through
each of these properties just get an
idea is there anything similar to that
you're not doing an analysis like an
appraisal or anything yet you just want
to see hey is this in the range of
what's normal if your property was
listed at 185 and everything else was
100 000 bucks in the neighborhood that
would be a red flag for me but in
general you're kind of in the right
price range you're going to do a much
more thorough analysis here in a minute
so that's just just a surface level
what's it look like price of the
neighborhood how are we looking so far
so now we can dig in a little bit more
with the income and other variables of
an investment property
so now that we're digging into the
numbers it's a good time to pause and
ask the question what is our goal with
buying an investment property i mean
it's fun to look at properties and
analyze them and do all this but really
there's a monetary goal behind this like
what are we trying to accomplish and i
would argue in the big picture what
you're trying to do is to build as much
wealth as possible with this property
and it fits into your overall wealth
building plan you're trying to do what
matters with your life you're trying to
have wealth that can pay for your bills
so you don't have to go to a job and
work for that money well in order to do
that this property has to make money in
a couple of ways you can simplify the
entire real estate game down to two ways
that a property makes money number one
it makes money with income so a property
isn't like a raw piece of land it's not
like cryptocurrency or a lump of gold
that don't produce any income this is a
rental property that you can rent out so
it produces income and that's one of the
core drivers of you building wealth but
it's not the only way the second way is
that this property has the potential to
grow in value so the price of the
property and also even the rent can go
up over time and there's a background
kind of growth of prices that's called
inflation and that's going to tend to
happen over time but also remember my
fertile soil metaphor that if you buy
the right soil if you buy in the right
location which is so critical in real
estate then you're going to increase
your chances that the price and the rent
go up over time now you might not be
able to predict exactly when the price
goes up or by how much but the beauty of
a buy and hold strategy is you buy this
property with that fertile soil in a
good location over time you get the rent
to pay your bills and hopefully to have
some positive cash flow then over time
good things can happen you can be
patient and wait for that property to go
up in value and you can make a lot of
money over time
with that patience
so keeping those two different ways to
make money with real estate in mind the
income and the growth of the property i
would start looking at this property and
trying to evaluate in a simple way how
good this property is at doing those
things and one of the simplest ways you
can start with and that i would start
with is something called the one percent
rule if you haven't heard of the one
percent rule let me explain it really
briefly it just means that you could
have a goal for a rental property that
the rent of the property is equal to
about one percent of the price that you
pay the total price all of your
investment price for that property so in
our example this property was listed for
a hundred and eighty thousand dollars so
in order for it to meet the one percent
rule it would need to rent for about
eighteen hundred dollars per month i'm
going to go into the rent in a little
bit and show you how i might be able to
figure that out but just knowing this
property 1800 bucks is actually probably
pretty close when you rent both of those
units out so this on the surface level
this property would be close to the one
percent rule you can also think about
the reverse of the one percent rule if
it works better in your head if you knew
what the rent was on the property
because the market determines determines
the rent right you can't just charge a
rent because it makes sense for you well
let's say you knew the rent for the
property was eighteen hundred dollars
you could also multiply that times one
hundred so one hundred is just the
reverse of the one percent rule so you
could say eighteen hundred bucks times
one hundred equals you'd have to pay
about 180 thousand dollars for this
property in order to meet the one
percent rule so you might ask yourself
why does the one percent rule matter why
do we even look at that in the first
place well as i said earlier it just
indicates how much rent you're
collecting as a ratio of the price
you're paying and so typically it just
shows you hey is this going to propagate
cash flow or not there's some more
digging and more homework you're going
to have to do and i'm not saying that
every deal has to meet the one percent
rule in order to be a good deal there's
a lot of factors that go into this but
if for example you buy a property that
doesn't meet the one percent rule but is
more like the point five percent rule so
let's say you have this property that
runs for eighteen hundred dollars and
you had to pay three hundred and sixty
thousand dollars for the property that
would be about point five percent of the
price that you're paying now that's not
necessarily a bad deal in some markets
right but it's going to be much more
difficult to make that cash flow you
have to put a large down payment in
order to have a mortgage payment that
could be covered by the rent on the
property now some of you might be saying
that's actually the typical like that
would be a good deal if i could get it
at the point five percent rule in your
market so if that is the case i'm not
saying that it's a bad deal necessarily
in my market i would be looking for
something you know close to the one
percent rule would be a pretty good deal
for me but if it doesn't all that means
is that you're getting a lot less income
because remember you're making money in
two different ways income and growth of
the property and if you're not making as
much money on the income if you have
negative cash flow or just breaking even
on the cash flow on the property after
paying your mortgage payment then where
are you making your money you're making
your money on the growth and it's just a
more speculative way to make your money
now that's not a bad way there's a lot
of people make a lot of money
speculating on properties especially if
you can buy and hold in a good location
and you're okay with not making any cash
flow for a while that could still be a
good deal but you just want to know what
you're getting into up front and you
need to know what your market what's
typical in your market and what a good
deal means for your market so all that
to be said the one percent rule or some
variation on that like the point seven
percent rule or the point 0.5 rule is
just a way that you can early on about
evaluate your property
so even more important to me though than
a one percent rule is something called
an unleveraged yield this is similar to
a cap rate so if you ever heard of a cap
rate i actually have a video
i'll put in the video description you
can check that out as well but the point
here is that what i want to figure out
is what is my ratio of rent to price of
the property that i'm paying but i want
to do that after expenses the 1 rule is
just a gross number a total rent number
but when you actually buy a property and
have to use it to pay your bills to have
cash flow you have to pay expenses you
have to pay taxes you have to pay
insurance you have to pay maintenance
you have to pay a property manager to
manage the property for you you have
vacancy every once in a while because
you don't collect rent all of the time
so taking all those into account and
figuring out something called your net
operating income that's what's left over
after you pay all those operating
expenses after you pay everything except
for your mortgage payment so you're
going to leave that out for the moment
we're going to assume that we don't have
any debt on this property even if you
are going to use debt you just assume
that because we just want to look at the
property itself we don't want to confuse
things by adding to the debt to the
equation yet i'm going to get to that in
the next step here but just this quick
and dirty analysis i just want to look
at this property and say how good is it
at producing income does it meet my
goals or not
so let me give you the formula the
formula is the net operating income
divided by your total purchase cost of
the property so purchase cost is your
price you pay but any repairs or other
costs you have as well so let's look at
this property itself i'm gonna have to
make a guess on the rent and i just
happen to know the location i probably
would call my property manager and say
what do you think the rent is for this
property and property managers by the
way i think are the best source of
rental information because they're out
there in the market leasing properties
they have real data but i'm also going
to show you in just a second how you can
do a little bit of research online to
maybe guess what the rent is but i'm
just going to guess for now knowing the
location that the two-bedroom side might
rent for about a thousand fifty per
month it's a little higher than normal
but this is in a little bit better
location and then 750 per month for the
one bedroom so that's that eighteen
hundred dollar total rent for this
property so i'm just going to do a rough
estimate on what the expenses are i'm
not going to do a line item with each
one like i will later on i'm just going
to say 55
of my total rent is what i have left
over to pay my bills to pay everything
else that's the net operating income
where did i get 55 from it's about an
average for a lot of my property some
are more some are less but on average
i've netted about 55 on properties like
this in my market so it's just a rough
number and when i multiply 55 by 1800
bucks i get around a thousand dollars i
round it up a little bit so a thousand
dollars per month or 12 000 per year so
now we can finish the formula i'm going
to assume we pay 185 000 for this
property and also have about fifteen
thousand dollars in cost i'm just going
to say assume i have some repairs and
some other cost so that's a two hundred
thousand dollar total cost so the
formula is twelve thousand dollars
divided by two hundred thousand dollars
equals six percent unleveraged yield so
that just tells me that you get back if
you paid cash for this property didn't
have any debt you'd get about six
percent of what you paid for it back in
one year
and how do you use this use this to
decide is this a good deal for me or not
when you compare it to everything else
out there in the market other properties
that i could buy other investments that
i could buy i could buy treasury bonds
which have low risk and i could turn
those over quickly or i could buy the
stock market you want to this gives you
a ratio that you can kind of compare
from one to the other and you have to
make a personal goal and compare this
also to your cost of financing the
property so the cost of capital is
another term for that and in my world a
five percent or six percent cost of
capital is kind of a normal thing for me
that's the total cost i would pay a
private lender or that might be the
total cost that i would have with a
mortgage lender after paying principal
and interest and other other costs to my
lender so it's just a rough number that
i want to kind of a threshold i want to
cover on a lot of my properties now i
have paid lower cap rates or lower
leverage yields in some cases on a
property that i think has a lot of
growth potential or i'm going to fix up
and do a lot to flip the property or
something but in general rental property
like this you know six percent is
actually uh something i would be
interested in i would look at this and
say okay i've done the quick and dirty
math let's go to the next step
so what's next for me evaluating a
property like this is to get out of the
surface level analysis which probably
took a couple of minutes to find out i
was interested and then go into more
depth so the end goal of this step is to
actually make an offer so especially if
i think i'm pretty close on price even
from that surface level analysis i want
to quickly start evaluating this
property probably going in person or if
i have a real estate agent on the ground
if i'm long distance let the real estate
agent or the property manager go out
there and look at it evaluate the
location evaluate the property itself
but then go even more depth with a
spreadsheet to run the numbers
so i want to show you how i would run
the numbers on this deal using a
spreadsheet that i made called the
simple cash flow spreadsheet if you want
a copy of the spreadsheet to follow
along with me or just to run the numbers
on your own deals you can get a copy for
free at the link in the video
description now the beauty of a
spreadsheet and the purpose of me using
it at this stage is i've done some quick
analysis but all that was approximation
so i want to go and sharpen my pencil so
to speak and get more specific numbers
in the output the final result of this
when i do all this work in the
spreadsheet is that at the bottom here
it tells me some important numbers it
tells me what is my actual cash flow or
my net income after financing after i
pay my mortgage payment so remember
before it was just a unleveraged yield
which is not realistic for most people
if you're actually going to use debt in
this deal so in this spreadsheet it can
tell you how much cash you're actually
going to have to invest that's up here
i'll show you that in a second and then
also what your cash flow is what your
potential return on that investment just
from the cash on cash return standpoint
also from paying down the loan a little
bit so it just gives you a better
picture of your overall performance of
this property when you buy it with real
financing numbers so i just want to give
you a couple tips on the spreadsheet
itself anything you see in red so any of
the text that's in red that's what you
can change you can put your own numbers
and you need to put your own numbers in
that for your property anything that is
text in black you don't want to change
so some of these numbers at the bottom
and black that is what the spreadsheet's
telling you and you if you change that
you need to know how to work a
spreadsheet behind the scenes feel free
to do that if you can but if you don't
just leave those those cells alone
so you can see here i've put in the
purchase price or the asking price of
185 000 i want to see if this deal works
at the asking price it's at right now i
put ten thousand dollars in repairs and
i put about five thousand dollars in
closing costs and then you go to this
next cell here you need to enter the
rent assumptions you remember i kind of
estimated the rent just out of the air
almost because i knew the location but
what if you don't know their rent so i
want to take a little side track here
and show you some tools online that you
could use wherever you are to try to
estimate the rent and insert it here in
the spreadsheet
so like i mentioned earlier my favorite
way to estimate the rent is having a
property manager on the ground who can
give you firsthand information if they
have some properties nearby they're
going to know exactly what properties
like that are renting for but you also
probably want to run your own numbers
and you can use online tools there's a
few that i like to use i'm going to show
you how to use rent-ometer but there's
also other tools like zillow rent
estimator and the bigger pockets rent
estimator i like to use all three of
these and i have links to all of them in
the video description below rent opener
is a paid tool i think i use the five
free reports here to do to do this
analysis but it's pretty cool because
you put the address in you tell what you
think the rent is you tell what the
bedrooms and baths are and you press
analyze and it gives you a summary of
what the market looks like for rent so
it's giving you data this is a lot like
an appraisal of a property when you get
the price of the property you want to
look at what other properties are
renting for and that's where this data
is very helpful so they tell you for
example that the median rent for
properties like this is 940
the average is 978. the 75th percentile
so the kind of getting up towards the
top 25 percent of this data set is 1062.
and my estimate was 1050 so we're still
within range and you can see the trend
line this is the rents have been going
up a lot since january 2021 not
surprising kind of where it is
but then i want to go look really the
most valuable part for me whatever tool
i'm using is the actual list of
comparable properties so i want to make
sure they're pretty close by a is where
our target property is here
and then i want to see like how far away
are these if they're way far away in
five six miles that's not as relevant
you want to have something relatively
close and pretty similar
what i like to do is sort by rent amount
so i want to look at like the highest
rent there's one for 1250 1050 0050. and
if you really wanted to dig into this
you would actually do more homework than
i have time to do here at the moment
look at these properties say i want to
find one property that's clearly better
than mine and find another property
that's clearly worse than mine so i can
kind of bracket on either side so for
example if i had a property that was 975
dollars or not let's say 940 dollars and
i knew this one was not as good as mine
for whatever reason the location is not
as good it's not as fixed up or
something and then i found another one
1250 that was clearly better than mine
now i know mine's probably not 1250
right now it's probably not nine 940
somewhere in between and then try to
find one that's as similar as possible
so i i think after i did a little
homework just offline here 1050 i'm
still confident on and i did another
analysis of a one bedroom and that was
about 760 was the median i felt pretty
good about that so in this case i've
confirmed my choices so i think i know
what the rents are in your case though
sometimes you might change your approach
you might want to be a little more
conservative and say i think i was
overestimating here maybe you were
underestimating other times you're
probably selling yourself short but the
data this kind of tool is very helpful
for you to kind of zoom in and
understand what your rent is
so now back to the spreadsheet let me
show you quickly how i would use the
spreadsheet and get down to the final
figures that show me whether i think
this deal is a good deal or not so i
would put a thousand fifty for unit one
750 for unit two that's a total of
eighteen hundred dollars i'm going to
estimate a five percent vacancy rate
that means that one out of every 24
months or so every two years is going to
be vacant that's not unreasonable for
properties in my area
i'm going to estimate that the full
value is about 205 we're going to have
about 200 000 in it i think that's
reasonable if we fix up the house a
little bit and use an appreciation rate
of three percent which is about normal
historical for my area in the upstate of
south carolina for financing i'm gonna
use a twenty percent down payment i mean
use a five and a half percent thirty
year loan which in the good thing about
the spreadsheet you don't have to go do
that math somewhere else it tells you
your mortgage payment would be 840 per
month this spreadsheet also tells you
that given that down payment given what
you're paying and closing costs and
repairs you'd have to have about 52 000
in cash so that's an important thing to
know right do you have that much cash if
you don't can you partner with someone
else can you figure out another way to
finance it that's a really key component
of you being able to do the deal
so as we scroll down here
it brings the rent down and now we're
going to have all of our assumptions for
our expenses so property taxes this is
one that can get you it's a whole other
video perhaps on how to analyze that but
if you look at the current property
taxes those aren't always accurate you
need to use like a calculator my pickens
county south carolina where i live has
an estimator so you can put in what you
think the property value is going to be
after you buy it because often when you
buy it at a higher price than what the
current tax value is the tax value goes
up and so your taxes are going to go up
so you want to not estimate what the
current ones are you want to look at
what they will be and learn how your
local municipality calculates that i did
that in this case it was about 28.60
2860 per year
insurance i had to call you know you
have to call an insurance agent i have a
spreadsheet with all my properties so i
kind of knew roughly what it was going
to be in my area it's about 800 bucks
per year maintenance and repairs those
are a whole other video as well how do
you estimate those i'm going to use
seven and a half percent of the rent for
maintenance in this case that's about 1
620 per year
and then about seven and a half percent
for capital expenses this is where i see
a lot of people underestimate their
expenses because capital expenses are
things like replacing the heating and
air unit replacing the roof replacing
driveways over the next 50 60 years
those things wear out over time and if
you're not estimating in your
spreadsheet here that you're going to
spend money on that you're missing out
and you're going to be surprised and
this happens all the time myself
included by the way early in my career
you get surprised by those big expenses
and you lose a whole two years of cash
flow because you weren't estimating that
up front and you think your deal's a lot
better than it really is so you do want
to estimate that you know seven and a
half percent for each one of those is a
total of 15 percent of my rent towards
maintenance and capital expenses for an
older property like this i would not be
surprised at all to have that number be
accurate
property management 10 percent in this
case i'm going to pay somebody 10 to
manage it so the total expenses are 8
952 per year in my estimate here which
is about 46
of the gross rent so about what i
estimated in my quick and dirty analysis
and this tells me that my net operating
income so before i pay my mortgage
payment is about 11 568. and so here's
where it gets interesting these are kind
of the bottom line numbers i have i want
to know my cash flow first and foremost
my cash flow per month is going to be
about 124
or per year
1484. and that's just my net operating
income minus my mortgage payment so it
kind of brought my mortgage payment down
here to tell me that so part one we're
going to do an analysis on that in a
second that's my cash flow estimate i
also want to look at my cash flow cash
on cash return so given that amount of
money i put down and i'm getting this
much cash back i'm making about a 2.85
percent cash on cash return
probably not a great number right and
historically you'd want to make a little
bit more but does that mean we do the
deal or not we'll talk about that in a
second
then i also like to look at what's my
total return with cash flow
plus paying my loan down some because
you're you amortize your loan you pay
the principal down a little bit and so
that in this case is going to be about
uh the two of those together
3478 per year it's about 3 500 per year
so you're making about 6.69 return with
those two factors considered but then
there's a third factor remember there's
growth of the property and this is just
a rough number on what growth
contributes to my overall return and i'm
assuming that three percent per year
remember i had a
205 000 estimated value if it goes up
three percent per year that would be six
thousand one hundred fifty in the first
year so this is just a real simple
analysis of a snapshot of the first year
i would make some cash flow some
principal pay down some appreciation for
a total of about 9 628 so given my
investment of 52 000 in cash that's
about an 18
return so not quite as
bad as you thought with just the cash on
cash return but a big portion of my
return here is from the growth of the
property
and so that brings me really back to the
point of this entire video and really
the point of analyzing a rental property
like this is this a good deal or not is
the 185 thousand dollars that's being
asked for this property on the open
market is that something that i could
pay is that a good deal for me and
looking at the spreadsheet like we just
did you might think okay well cash on
cash return is not great but the overall
return 18 percent that looks awesome
well we need to go one more step because
the problem with that simple cash flow
analysis is it assumes that you're going
to sell that property in year one all of
that appreciation all that principal
paydown you actually don't get to use
that it's not a return yet until you
sell the property so i want to show you
one final formula that i use that is
really the ultimate formula for me to
have a go no go is this a deal i'm going
to do or is it not going to do and it's
something called the internal rate of
return
so i'm going to show you one final
spreadsheet about internal rate of
return and the big difference here
between the simple cash flow spreadsheet
and the internal rate of return is it
takes time into account so it's going to
take all of that information we had from
the annual cash flow from one year and
it's going to spread it out over
whatever time horizon we want to think
about i usually use 10 years because
even if i have a deal that's going to be
a smaller buy and hold like a four or
five year i want to estimate just in
case i have to hold it 10 years what
does it look like so that's what an
internal rate of return does it assumes
that you have some investment up front
some amount of money you put in and then
you get a series of cash flows so one
year two year three year four year and
then when you sell the property you get
the bigger cash flow on whatever you've
made from that property going up in
value from you paying your loan down and
it takes all that information and it
gives you a summary rate of return what
is the rate of return given all the time
because a dollar 10 years from now is
not the same as a dollar today and
that's what this formula helps you
calculate so let me just show you if you
want to go in more depth on internal
rate of return i'll have another link to
another video that i did on explaining
how this works and going in even more
depth with this spreadsheet but just a
summary for this deal i've used the same
numbers we had before the purchase price
the repairs the closing costs i use the
rent the net operating income and on
this spreadsheet here i'm doing one tab
that's unleveraged so with no debt i
want to know what my internal rate of
return if i had no debt on the property
and i'll do another one with debt so i'm
assuming i had 200 000 invested up front
and each year if i had no debt i would
make 11 569 in cash flow that's your net
operating income so you can see that
i've added in a little bit of growth
each year of three percent um to that
cash flow so you're one two three four
five six seven all the way to year ten
and then year ten we have an assumption
that the property went up in value by
three percent i'm going to change that a
little bit to see what it does to the to
the variables but if it went up three
percent and i paid a six percent
commission and i did all of that here at
the bottom of the spreadsheet so if you
want to get the spreadsheet and download
a copy of it i have a link in the
description as well you can see behind
the scenes of how the spreadsheet works
but the bottom line is year 10 you got
no not only the rental cash flow but you
sold the property paid a real estate
commission you had no debt to pay off so
you made 258
973
total of 274 in the year 10. so what
does that mean for us that means if you
invested 200 000 today got all of those
cash flows and sold it in year 10 you'd
have an 8.5 percent internal rate of
return with no debt
let's look at the same thing with some
debt because we did use debt in this
case we had a 20 down payment we had to
pay for some repairs and a very similar
analysis but we had a 52 thousand dollar
upfront cost
we made some cash flow every year
remember not a large amount and then we
sold the property and we pay off our
debts you have to figure out what's the
debt
balance going to be 10 years from now
and i did that behind the scenes and i
made 136 812 in 10 years so if you bring
that back and say what is the internal
rate of return on my 52 000 given all of
those cash flows over a 10-year period
is a 12.34
return and so here's the moment of truth
is that a good deal for me or not and
have i put in good enough assumptions to
say is that something that i can live
with so this is a very personal decision
for some people you're going to say 12
using leverage doing all this work over
a long period of time not good enough
other people are going to say hey i'm
getting a lot less in other places or i
don't trust the stock market that's
something that i'm okay with and so
you're gonna have to decide whether
that's a good deal for you or not for me
in my case we're not growing a lot right
now we're just kind of maintaining what
we have we sell a property we recycle it
i'm looking more for quality properties
and i would actually adjust these
numbers a little bit in my case knowing
what i know about this property i'm
making a bet so every investment is a
bet i'm betting right now i assume that
the value would go up by three percent
per year i want to look at it just
because i'm making a bet what would
happen in this case if i'm on the upside
now i know conservatively you know the
property could go flat it could not go
up but what if it went up by five
percent per year because i have a gut
feeling this is just a speculation right
this property over the long run might go
up even more and if it went up five
percent per year instead of a 12 and a
half percent internal rate of return
you'd have a 15 rate of return so i'm
willing to live with and i would buy
this property at the price that it was
asking for
because of the location because i really
like that location because i think it's
going to be even better than 10 years
from now i think the average in our area
just if you look at inflation and
appreciation for a normal property would
be about three percent growth per year
and so i could i'd be willing to live
with that kind of base scenario about 12
and a half percent return with an upside
of maybe 15 16 return if things got a
lot better and so that's the decision
you have to make for yourself is that a
good deal for you is it not a good deal
that's where the personal side of
investment real estate comes in
i want to make one final point about
this deal that you might find
interesting my main purpose of making
this video was to show you my thought
process and to show you the tools that i
would use to evaluate a real deal but
the interesting part about this is this
is a real property that someone actually
bought so you might be interested in the
end of the story of how this happened so
back in november 2021 this property came
on the market for 185 000 as i've told
you before it went under contract three
days later on november 8th so bam the
property's on the market somebody puts
it under contract very quickly they did
all of this analysis or their own
version of it very quickly and then they
bought it on november the 19th so the
property was in less than two weeks on
the market before closing very quickly
meaning an investor bought it somebody
with cash who was willing to buy the
property and just pay cash for it
probably with a very short or no
inspection period and so they thought
this deal was a good investment that
doesn't mean just because another
investor thought it was a good
investment that you would also buy it
this is a world of variety all investors
have different criteria you'll probably
have to pass on a lot of properties that
other people think are good deals but
it's just interesting to hear the end of
the story and understand for yourself is
this a deal you would do is this a deal
you wouldn't do that is the main lesson
of this video is it for you to go
through to use these spreadsheets that i
share with you to use the tools that i
shared with you to understand for
yourself what it means to have a good
deal so that you can go buy your own
duplex your own rental property and
build wealth for yourself i want to
remind you that there's a lot of goodies
that i've mentioned throughout this
video there's the simple cash flow
spreadsheet that you can download and
get for free to run numbers on your own
deals there's also the deal worksheet
that i mentioned that has the checklist
and you can use that and print it out or
have it on your computer to analyze your
deals as you're going out and looking at
them there's also the internal rate of
return spreadsheet and also the
additional video that i made on internal
rate of return links to all of that will
be in the video description below and
the link to the video will also be above
me here somewhere you've been watching
the coach carson channel which is all
about helping you get out of the
financial grind so you can do more of
what matters i'm chad carson you can
also call me coach and i'll see you in
the next video