have you ever wondered how to analyze a
rental property to tell this a good deal
or if it's not a good deal well in this
video I'm gonna let you look over my
shoulder as I share the approach and the
formulas I use to analyze a rental
property and I promise you is gonna be
so simple you can do it on the back of a
napkin an envelope or whatever scrap of
paper you might have in fact that's what
I'm gonna do I'm gonna draw on a piece
of paper and show you what I mean I mean
no fancy calculators or spreadsheets in
this video and we're getting started
right now
hi I'm Chad Carson from coach Carson
comm I'm also the author of retire early
with real estate a best-selling book
published by bigger pocket if you're new
here this is a channel all about
investing in real estate so you can
achieve financial independence and do
more of what matters be sure to hit the
subscribe button in the bell so you
don't miss anything now I'm gonna pull
out a piece of paper and a pen and show
you my back of the envelope approach to
analyzing a rental property okay let's
jump right in the approach I'm gonna
talk to you about today is called back
of the envelope analysis back of the
envelope analysis and so I promised you
in the beginning that we weren't going
to be talking about fancy calculators or
spreadsheets and there's not that
there's anything wrong with using those
I definitely use those and we could talk
about those in other videos but I heard
a quote and I want you to guess who this
is by that really impacted me pretty
early on and said if you need to use a
computer or a calculator to make the
calculation you shouldn't buy it I'll
give you a hint probably probably the
best investor of all times all right
you guessed it we're in Buffett so
Warren Buffett multi billionaire
investor said if you don't you need to
use a calculator computer to make the
calculation you shouldn't buy it now why
is that because a good deal in his
opinion and I found it to be the same
thing if you should be able to
approximately calculate the numbers and
if it jumps off the paper and says wow
this is a good deal the numbers look
really good then you move forward if you
have to get so precise and calculate it
with to the nth degree to the third
decimal place you've trying too hard to
figure out it's a good deal it should it
should look like a good deal with
approximate numbers and that's what I'm
going to share with you today we're
gonna go over some formulas and these
are good formulas that you can use but
you can be approximately right with the
calculations you don't think it's super
fancy with the math and we're gonna look
at a deal from several different
different angles and as you can remember
these and calculate them over time and
you can use whatever scrap of paper you
have to do the analysis you can do this
while you're in a car looking at a
property you can do it when you're back
at your desk wherever you happen to be
this is a tool or a toolbox that you can
use to analyze a deal and know if it's a
good one or not before we jump into the
formulas I want to take a step back and
talk about
what the job of these rental properties
you're gonna be analyzing actually is so
the job with a capital J meaning why in
the world are you buying around property
in the first place what is it going to
accomplish and I would put forward that
for most of us you know you're watching
my channel so hopefully you are
interested in financial independence
you're interested in maybe building
wealth if you're just getting started or
trying to grow your wealth but
eventually you're also interested in
living off of income so you want to use
real estate in some form or fashion
these rental properties you're buying to
actually accomplish some of these goals
and so the key question when you're
analyzing a deal to keep in mind the
reason I'm taking a step back here is
that those are your goals how are you
going to accomplish that how are you
going to do it that's really what
analyzing a deal is telling you and so
you want to always keep that in mind
keep that big picture in mind and at
least in my opinion if you boil down
analyzing deals and analyzing rental
properties it kind of comes down to two
different ways they're basically going
to make you money one of those is a
rental property can produce income so
you collect rent you pay your expenses
and what's left over is income to you so
that's number one number two is that you
can use the rental property to build
equity and if you look at that in
another way it's that you've heard the
old expression buy low sell high so
essentially you're making money on the
price of the property either by buying
it low right now
or doing something to the property to
make the price go up or it's letting the
price go up over time so in all cases
you're either using the income to put in
your pocket to put your bank account to
pay down a loan or you're using the
equity to build up over time and then
eventually sell the property or
refinance it but really these are the
engines that are going to help you
accomplish your financial goals so I
just want to remind you that all the
formulas that we're going to look at
here in this video are essentially
helping you measure how good a property
is at either one of those and you're
going to want to set your own goals in
both cases for these formulas and I want
you to look at these formulas it's sort
of like if let's say you were analyzing
a property in my in to see if the
property needs repairs and you're gonna
fix it up when you're going to looking
at property you don't just look at the
property from the front of the house do
you
you also walk inside the
you look at the bedroom you look at the
bathrooms you walk around the back of
the house you crawl under the crawlspace
or go in the basement and that's
essentially what we're doing here we're
gonna look at each deal from a bunch of
different angles not if you just take
one of those by themselves if you just
use a cap rate or just use it 1% rule
just use buying low and a certain price
you know that by itself is not enough so
that's what I'm gonna try to share with
you is my approach that's
back-of-the-envelope approach to how do
you analyze income and how do you let
analyze equity all right I'm gonna start
by explaining some approaches to
analyzing the income of a rental
property so we're gonna go over
something called the gross rent
multiplier the cap rate the net income
after financing and a cash on cash
return right now we're gonna start with
the gross rent multiplier sometimes
called the G RM if you're brand-new to
analyzing rental properties gross
doesn't mean disgusting it means the
total rent so here's how this works
you use this kind of tool to roughly
look and this is often used on when
you're analyzing a market not
necessarily a specific rental property
but I'll show you how to apply this to a
rental property but you would look at
the total price or maybe the average
price on a market and then you would
divide that by the total annual rent so
let me give you an example of that let's
say you found a property that is worth
or that has a value of 144,000 and then
you you were able to look on Zillow or
talk to your rental property person and
you were able to figure out that it had
$1,000 per month rent which on an annual
basis you want to convert that to an
annual number it's twelve thousand
dollars so you just apply this formula
you say 144 thousand divided by twelve
thousand and I kept my math really
simple on this one is twelve so you to
say that it has a gross rent multiplier
of twelve how does that help you that
helps you in comparison to other
properties so let's say you had another
property that was worth three hundred
thousand dollars and you were able to
analyze that one and figure it out that
the rent was twelve hundred fifty
dollars per month so that means it had a
fifteen thousand dollar annual so yearly
rent is that the gross rent multiple
on that is 20 so the value of this kind
of thing is comparing one property to
another or more are more commonly one
market to another and so a Grossman
lower engrossment multipliers like 12
would be better so the lower the number
the better the higher the number the
less good this property is or this
market is at producing income and so if
you look at a market analysis often if
you look at like San Francisco and some
of the bigger markets you might have an
average gross rent multiplier in the 30s
or 40s whereas if you look at on the
opposite of the spectrum some of the
highest cash flow markets in the country
like Detroit for example might have a
Grossmont multiplier of 8 and then a lot
of the healthier markets the ones you
might want to be in could be anywhere
from 10 to 20 and so that that's kind of
the starting point of why you have used
a gross rent multiplier but we're
analyzing specific rental properties and
so there's a specific application of
this they don't want to talk about
called the 1% rule but we take this
gross rent multiplier and we and we
apply it to a specific property and I'll
go into that right now
so the 1% rule is basically a rule of
thumb or a shortcut and you typically
use it when you're early on in the
analysis of a property so for example
your realtor sends you a bunch of
listings and you just want to see is
this approximately a good deal it's not
gonna be something you buy a property
based on I hope you're not you're gonna
do some other nail analysis in addition
to that let me tell you what it means
basically it means that the monthly
gross rent of that property if you want
to meet the 1% rule the monthly gross
rent should be equal to or greater than
1 percent of the total purchase price
all right so let me show you an example
of a property that would meet the 1%
rule let's say something rents for
$2,000 per month your realtor sends to
you the deal and the property is listed
for one hundred and ninety thousand
dollars and it's in pretty good shape so
the total purchase price also includes
repairs by the way so it was a major
fixer-upper and you need you to put
$100,000 into the property that's not
what we're talking about we're talking
about your all end cost is going to be
about
ninety thousand is 2,000 greater or
equal to one percent of one hundred
ninety thousand so one percent it's
always easy to figure out one percent
cuz you just take the decimal place and
you move it over to two times so 1900
would be one percent of one hundred
ninety thousand and yes two thousand is
greater than 1900 so it meets the one
percent rule let's look at a property
that does not meet the one percent rule
let's say you have a property that rents
for that same two thousand dollars but
then you can you could buy it for
$300,000 well one percent of three
hundred thousand is three thousand
dollars and so that's not it's actually
less than so that one does not meet the
one percent rule now why is this helpful
this is remember similar to the gross
rent multiplier that we're just looking
at the monthly gross rent we're actually
not looking at the expenses on the
property and all that so that's why it's
just a starting point but this is a
really quick approximation you saw how
fast I can do that you can be looking a
lot of properties and screen them based
on whether it met the one percent rule
or not and I'll acknowledge and this is
something we can go in more depth on
another video about the one percent rule
that not all properties and not all
markets we're gonna easily meet the one
percent rule and so you're gonna need to
make a decision based on all these
formulas that we look at does it need to
meet the one percent rule for you to buy
the deal or not can it be close could it
be like the you know the point eight
percent rule that meets your criteria
but the fact is is this is a measurement
of approximately how good a property is
at producing rental income it is better
than the one percent rule it's better at
producing income it is not it's not
gonna produce a lot of income so you
better make some money and some other
ways if it doesn't meet this rule once
you've used the one percent rule of a
gross rent multiplier to get an
approximate maybe it kind of a
pre-screening of the deal a much more
in-depth and accurate analysis of the
properties gonna be what's called a cap
rate let me define the cap rate with a
formula and then I'll explain a little
bit more what it is and how you can use
it so the cap rate formula is that you
take the net operating income on an
annual basis of the yearly net operating
income I explain what that means in a
second and you divide that by the total
purchase price that's
total again because it's not just a
price that you see listed it needs to
prepares you got to add some other
things to it you want to include your
total price for the property so let me
explain what the net operating income is
it's essentially when you take your
gross rent that we we talked about in
the last last part of the video and you
subtract all of your operating expenses
so this includes your management fees
your taxes insurance maintenance all of
those things and what's left over and
you actually I just want to emphasize
you're not taking out you your any kind
of debt payment so no mortgage payment
yet I'll explain why in a second but
when you take your gross rent you
subtract all your operating expenses you
get what's called your noi your net
operating income this is a really
important number because if you think
about it you know if you want to compare
apples to apples like one property to
another every property has a little bit
different and debt a little bit interest
rate somebody puts a different amount of
down payment so to be able to compare
two properties and see the ratio of how
good a property is at producing income
compared to the price that's really what
this tells you I cap rate the way we're
looking at now you can use cap rates in
all sorts of different ways people use
them for market analysis use them to
compare you know a region of a market
compared to another region or different
types of properties but what I'm talking
about here so you can use this as a goal
to understand whether this property is
good at producing income or not
let me give you an example of how that
might work
so let's say a property produces ten
thousand dollars and net operating
income and you could buy the property
for $100,000 all in you can pause this
and do the math if you want to pretty
simple math in this one ten thousand
divided by one hundred thousand means
the cap rate is 10 percent all right so
let's look at another one now let's say
that same property only produced five
thousand dollars per year this is an
annual basis remember net operating
income divided by and you can pay the
same price for it then your cap rate
would be five percent so you've ever
looked at return on investments or
dividend rates or earnings rates and
stocks for example it's a very similar
concept here you're basically looking at
what's that ratio what kind of
turn could I get if I just paid all cash
for it didn't have any debt on the
property and I find it very useful
because it always reminds me of the
opportunity cost of what I'm doing
investing this property when you start
involving debt and down payments and
cash on cash return something we're
gonna talk about here in a second then
it gets a little messy you can you can
play some games with this but it's hard
to play games when you look at how good
a property is a producing income with a
cap rate and you can compare that to
other things like what if you could go
get a bond you know like a Treasury bond
or something which which basically has
zero risk you know it's not a risk of
default as passive you know I'm gonna do
a lot of work like you are with a rental
property and you could get that at 3%
and you're buying a property that's also
at 3% as a cap rate you know maybe you
maybe you buy that property but I would
really have to start wondering to myself
I could buy a completely passive no risk
Treasury bond for 3 percent and I'm
buying this rental property for 3
percent I better have a really good
reason to buy this rental property maybe
I am maybe it's a great location and I'm
feel very certain that it'll go up at 3
or 5 or 10 percent per year well that's
it could happen it's a little bit
speculative but you at least need to
answer that question for yourself
because the first and foremost the thing
a rental property is there to do is
prove income and that's what this
measures it cap rate measures the
ability to produce income now that but
you might be saying but wait a minute
Chad when I buy rental properties most
of the time I do use a mortgage I do use
debt so how is this relevant well it's
just again it's just the first step is
one way of looking at it and we have
another formula that I want to share
with you now that brings in the fact
that you might use a mortgage and it
helps you analyze the income from that
standpoint so this additional formula
called the net income after financing I
see is it a really good complement to
the cap rate I start with a cap rate I
want to know without any debt how does
this property do at producing income but
then we often do use debt maybe you
would to to buy a property and so you
want to bring in the income after
financing so here's the basic formula on
how that would work you would take the
net operating income which we talked
about with cap rate but you can also see
an additional video so it'll link above
I have a video on how to calculate net
operating income
you take that number and you subtract
your financing cost so for example let's
say you calculated that your give a
duplex and that duplex on a monthly
basis produces $1200 per month and net
operating income so $1200 per month and
you figure out that your mortgage
payment is $800 per month so that's
going to be going out of your pocket to
pay your mortgage so the difference
between those two is just four hundred
dollars per month and that's your net
income after financing and you know
really when it comes down to it this is
one of the most important numbers
because it basically tells you what
you're gonna be putting in the bank of
course there is some tech there are some
tax implications which I'm not gonna get
into this video it's a little bit more
complicated but I will have some future
videos to talk about net income after
tax but this is a pretty rough
estimation because you have a lot of tax
benefits like depreciation and things
like that help you shelter your income
it's a pretty good estimate of how much
you're gonna be putting in the bank four
hundred dollars per month so some people
use this as their primary goal they
might look at a property and say okay
it's got two doors it's a duplex that
means that's two front doors two units
and they might have a goal of having
$200 per door and net income after
financing so you could do that and then
you could run the numbers and say if it
doesn't have $200 per door then I'm not
gonna not gonna do the property if it's
a house and you want to make just make
sure you have $200 in cash or net income
after financing per month and you would
just make sure that should go and you
would just run the numbers you would do
this analysis on a very basic net
operating income estimate you would be
able to run your estimate your financing
cost which by the way is a little bit
more another step to doing that you can
go to an amortization calculator online
and do this very simply by by just
putting in the amount of the loan you're
going to be borrowing the estimated
interest rate and it'll tell you the the
payments that you would have and you can
go to the one that I like to use a lot
of a link go to coach Carson comm
forward slash and more to ization I
spell that right so coach Carson comm
four slash amortization that'll take you
to a really when I'm used for years I
have no affiliation with that but a
calculator I like and it'll help you
figure out you
payment or your financing costs so that
is the net income after financing and
I'm going to talk about one more formula
it has to do with income called the cash
on cash return it's also very helpful to
go along with this formula alright so
this is the last of the formulas that I
want to talk about with analyzing income
for a property this is called a cash on
cash return and this is one that I would
use to compliment the cap rate and the
net income after financing because it
gives you an idea what kind of return
you're getting on your down payment or
the amount of cash you have invested if
you use financing and so I just
explained how to use net how to
calculate net and come after financing
so the for this one you just need to
figure out how much cash you put into
the property and I say down payment but
it might be in addition to the down
payment you make when you purchase a
property might include any other cash
you have for repairs or closing costs or
things like that so you want to make
sure you include everything but let me
show you an example so we know the
numbers we had from know from the last
calculation last formula you have four
hundred dollars per month and net income
after financing so for a year that's
just four forty four thousand eight
hundred per year and let's say that you
had a fifty thousand dollar down payment
so remember I do really approximate math
with these you don't to be exactly you
know what if I looked at that without a
calculator I would just say you know ten
percent of fifty thousand it's five
thousand there's a little bit less than
that so it's around a 10 percent return
a little bit less a little bit less than
ten percent but a round a ten percent
cash on cash return now why is this
valuable this is valuable because you
have to be disciplined with your cash so
when you invest the cash in a property
you lease just want to see how much of
that cash am I getting back in year one
that's really what this means it means
based on the numbers I have I put fifty
thousand bucks in I'm gonna get about
ten percent of it back and so you can
compare that to other investments that
you have you could put it in the stock
market and maybe you get an index fund
that gets you two percent dividend rate
and that kind of thing is important to
you if the income return is important to
you then that is a good measure of it
the thing I'll say about cash on cash
return that was kind of a tricky
calculation because
when you use leverage it can sometimes
not be as important as some of the other
ones like cap rate and net income after
financing for example let's say you
you've got a very small amount of cash
flow and you got $100 per month or $1200
per year $1200 per year but then you had
$1000 thousand dollar downpayment
somehow you know you or maybe maybe even
a you know you got a FHA loan and you
put a really small downpayment had a
good good price on it so you put three
thousand down well all of a sudden you
have this incredible cash on cash return
this is all this is like greater than a
30 you know 33% cash on cash return and
you might say wow that's incredible 33%
but these are really small numbers 3,000
down 1,200 per year and what if you
ended up getting three thousand dollars
per year in cash flow you'd have a
hundred percent return isn't that
incredible and it's the best deal ever
well maybe maybe not because you're
magnifying your returns because you're
using so much leverage using a high
amount of leverage nothing wrong if
that's a good deal for you and that
makes sense but my point is this is why
you look at a lot of different formulas
you want to use a cap rate you want to
use net income after financing and make
sure that it works in multiple ways not
just a cash on cash return but I do
think it's a good one to bring into the
mix as you try to have discipline for
making sure you're actually getting a
return on your cash all right so I spend
a lot of time going over
back-of-the-envelope formulas for
analyzing the income of a rental
property and I spend a lot of time
because those are really the
foundational pieces of an analysis you
know we call it rental property for a
reason because it produces rent that's
one of the main reasons we buy it we can
use that rent to put money in our bank
account we can use that rent to pay the
debt we can use that rent to to have it
grow over time and make more rent but
that the point is that income is very
important but there are cases and the
reason I want to give you another tool
to also analyze along with those income
formulas is that sometimes the income is
not as good and might not be the main
reason we buy a deal I like to get
properties of produce both income and
have some equity
potential but especially in a hot market
and some in some type of time to even
within any market if you buy some of the
higher quality properties you know it
might not be a screamer of a deal just
on your cap rate and net income after
financing that sort of thing and so
equity analysis is another thing that
you need to understand and bring as a
tool at your toolbox and let me first of
all define what equity means it
basically just means what you own the
reason I have a balance sheet drawn here
this is a really important concept to
understand is it in any business and
finance and investing you have the same
thing you were you were basically buying
assets so in our case is a rental
property or a piece of property you can
be buying a stock or a CD or whatever
and it has a certain value so you could
think about like this this this column
here is the value of that property and
to buy that property you often use debt
so you have a liability and then the
difference between your asset and your
liability and that's actually the
formula for figuring out your equity is
assets minus liabilities equals the
amount of equity you have in a property
or you have in any other ownership of
other things really your net worth
that's when you calculate your net worth
that's just the total of all of your
assets altogether and you subtract all
of your liabilities what's left over is
your equity and in really in the end of
the day that's the game we're playing
we're trying to increase our equity and
we're trying to get a larger net worth
and that's how you built that's what
wealth building is all about and when
you get to a certain amount of wealth
you can then retire off of it you can
live off of it and have financial
independence so that's why this is an
important concept to understand and I
want to mention when you're analyzing a
deal there are four basic ways to
increase the equity that you have in a
property because when you start off you
can think about a real simple example if
you bought a property for $100,000 and
you put $20,000 down you know you'd have
an $80,000 loan or debt so in that case
you're starting up you're putting
$20,000 into the property right
that is your original equity day one how
can we make that getting bigger that's
what we want to do and build wealth and
so these are the four ways you can
that the first thing you can do and I'm
gonna say these first two are the most
important when you're analyzing deals
these say these third and fourth are
important but I like to usually kind of
have those after the fact those are kind
of gravy in addition to what I'm making
here at the beginning so the first thing
you can do is you can buy a property at
a discount so this is the whole buy low
sell high so if you can because you're
bringing cash to the property or you
just find a situation where somebody
just needs to unload it and sell it
quickly it's not unreasonable you could
get a 10% discount a 20% discount maybe
even a 30 or percent or more discount
this is not like stocks where you have
millions of people trying to time buy
properties or buy stocks you are one
sell one buyer and then what you might
talk to a seller where it makes sense or
both of you to work together and to buy
a property it might be because it's a
bank and they just took it back and
foreclosure and they don't want to do
the work to maximize the value of this
property might because somebody
inherited the property and they're out
of town might be another situation a
divorce foreclosure and sometimes just
life happens and people want to solve a
problem could be a landlord who's just
tired of the property but whatever
reason it could happen and it's happened
a lot for me that you can buy properties
below its current value so you buy it at
a discount and by doing that so you
might buy a property for a hundred two
hundred thousand dollars but the real
value might be a hundred and twenty
thousand dollars so you put twenty
thousand down but you also have you have
an additional twenty thousand dollars
and equity so you just by negotiating
just by by doing a good job asking and
searching for properties you turn that
twenty thousand into a total of forty
thousand dollars that's pretty good
right you're making money when you buy
and so the way you can turn that into a
analysis what do you how do you look at
that
you might say all right when I buy a
property I want to make sure I get a
least a 10% discount along with some of
those other income formulas and maybe I
have a two hundred dollar per month goal
to make a net income after financing and
I want to get a ten percent cash on cash
return and I want to make sure I buy at
least at a ten percent discount or maybe
you want to be a little more aggressive
you've been buying more properties and
you're better at buying maybe you want a
twenty percent discount so that would be
a way you can analyze a deal by invited
a discount but another way of looking at
that and this is often where I find my
best deals is it might not be on the
surface you might not be buying it below
its current value right away you might
need to do something to it to force the
appreciation so that the after repair
value for it is is higher than the
current value so a fixing up fixing up a
property is the most common form of
adding value to a property you go in
there and you add an extra bedroom to
the property because you turn a dining
room into a bedroom and it costs you
five thousand bucks but it increases the
value of the property by twenty thousand
bucks for example that would be a way of
adding value if you buy multi-unit
properties just by increasing the rent
maybe to the market rates or decreasing
expenses on the property you're adding
value so the value after you do those
repairs could be another way of
increasing your equity you buy it for a
hundred thousand bucks but you do
something to it spend some money on it
and you increase your equity so in both
cases you're doing you're controlling
the profit the amount of money you make
on the property by increasing your
equity so I like to use those to analyze
deals these other two are also important
so when you own a long term rental
property if you can just pay the
mortgage down over time and have give a
20 year loan and you're at least
breaking even on that loan you're going
to be building equity month by month by
month by paying down your mortgage so
it's definitely important I don't
necessarily always calculate that
upfront and this back of the envelope
math but it is definitely something you
can make money on as a rental property
and then pass it appreciation you can
make you very very wealthy by buying in
the right locations and it's holding on
I don't use that necessarily as a
back-of-the-envelope analysis although
it could be a big part of my long term
wealth building plan because I want to
buy a property that meets a certain goal
income that maybe meets a certain goal
with equity I buy it 10% below value or
it's in a really good location really
good property I might not need to get a
discount at all as long as the income
anything else works so this is how I use
equity analysis to kind of complement
the income of a property and be able to
analyze a deal using back of an envelope
or the back of a napkin or whatever the
case might be all right I want to put
everything together that we've talked
about here but the income analysis and
also the equity analysis and put it in a
step-by-step approach that you can use
today if you want to go out and analyze
a rental property so the the first step
really the pre step is that you need to
set some goals for yourself so before
you go and analyze idea you've got to
know what you want remember that
property has a job to do and so how is
this job going to how is this probably
going to do its job for you you can use
multiple formulas that's typically what
I do I use a cap rate I use a net income
after financing and I usually use a
discount to the value so I use a few
different ones to look at that and you
can also you if you want to get a cheat
sheet that has all of these formulas in
one place that you can face like carry
around with you and use you sure to
either look above in the video or in the
show description and the video
description below for an analysis cheat
sheet and you'll be able to get that and
download it for free and it's just a
one-page PDF that will help you set some
goals for what's important to you but
once you have that you have this written
down right and you go to step number one
just go out and find a property you can
find it maybe you found one on Zillow
maybe someone sent you one maybe your
realtor sent you a list but step one of
course find the property to analyze
number two is you want to gather some
information so with the int from the
income standpoint you need to gather
information on the rent and the expenses
to be able to calculate what some of
these other formulas are and you can get
approximate numbers to start off is you
get into more detail and you're making
an offer on a property you really want
to check your assumptions to get even
more detail but my thoughts are earlier
in the process you are the more
approximate you can get even to the
point where remember we calculated the
net operating income almost sometimes
just use something like a 50% rule where
I say you know what approximately 50% of
the rent is going to go to expenses so I
can figure out my net operating income
really easily by just saying all right
50% of the RET equals certain amount
that saves $1,000
and then 50% of that I would have $500
in expenses so I net operating income of
$500
it's kind of small writing there sorry
about that but my point here is you're
gonna gather information on the rent and
the expenses just approximately best you
can so that you can then go to step
number three and and create a snapshot
that's an important term here because
remember you're just doing this on a
piece of paper on envelope you're just
trying to get a snapshot like it just
almost like you're taking a quick
picture of this deal at this point in
time and so the only thing you need to
think about is you know which snapshot
formulas you're going to use I like to
use the one percent rule early on in the
analysis I'm just kind of a first step
of my income analysis I get past that
then I like to do definitely these
middle two the cap rate and the net
income after financing sometimes I also
run a cash on cash return and so that
snapshot is you just have a piece of
paper and you would have the formulas
and the things that is talked about here
and it took me you know a while to
explain all these but it might take me
two minutes to do these analysis maybe
it takes me another few minutes to
gather the rent and expenses if I'm not
familiar with the area and then I put
those on a piece of paper and it's had
those sitting there next to each other
that's what a snapshot means to me on
that envelope the next thing I would do
after doing the income analysis that's
what I always do I then study some
comparable sales so you want to look at
what properties are selling for both in
as is condition comparable to what
you're looking at and maybe also an
after repair value so that that's
something your Realtor can also help you
out with your property manager if you're
not real familiar if you're brand-new
but with that information I'm going to
do a quick equity snapshot so I don't
want to look at the current discount so
am i buying it for a hundred thousand
and it's worth one hundred and twenty
thousand so I have a twenty thousand
dollar discount from the full price or
maybe more commonly you're buying it for
a hundred and you got to do something to
it to make it worth eight hundred and
twenty thousand dollars maybe you got to
spend five thousand bucks to get 120
thousand dollar increase so but in case
I want to know that I'm getting some
kind of discount to the full value
either just by paying cash and closing
quickly or by doing something in the
property so that is the process
that I go through and I do this all you
know maybe you do use a little
calculator on your on your phone to do
some of the basic math or as you get
more practice of this maybe you don't
have to use a calculator at all but this
is a great first step to analyzing a
deal by the time you get done with this
you should know is this really a good
deal or is it not remember Warren
Buffett's wisdom if you have to use a
calculator or a spreadsheet to tell you
that it's a good deal you probably
shouldn't buy it when you get done with
this you're gonna be either excited
you're gonna be like yeah I'm not sure
and yeah by all means bring in a
spreadsheet especially the bigger the
property is if you're doing a big
multi-unit property with multi-million
dollar you know kind of numbers and
you're gonna say bring in partners and
banks you're gonna need a spreadsheet
but I'm willing to bet people if Warren
Buffett can buy five billion dollar
company investments we can buy some even
a million-dollar multi-unit property and
still do back of the envelope analysis
is that closest I just want to remind
you that if you want to get that
analysis cheat sheet be sure to click it
look in the show the description of the
video below and you can get that cheat
sheet and if you like this video like
other you're gonna like other things
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you have any questions on analysis
anything I can help you with is there
anything that wasn't clear I made in the
video I would love to hear from you on
to everybody in the comments really
appreciate you watching the video I look
forward to seeing you next time