Hello real estate investors and enthusiasts, welcome back to the blog. Today we’ll be talking about How to Evaluate Deals the Quick and Easy Way. We made a video about a year ago describing how to analyze a deal. We got very technical in that video. So let’s stay at surface level today and keep this straightforward using what I call: The Four Step Check.
HOW DO WE EVALUATE USING THE FOUR STEP CHECK?
Ok, so what is the 4 Step Check and why do we want to use it anyway?
Our four steps in the 4 step check are steps calculating:
- Monthly Income
- Monthly Expenses
- Monthly Cash-Flow
- Cash-On-Cash Return
Why do we want to know these things? It’s important to evaluate how our money is coming in, going out, how much the difference is between those two, and if we are making a good investment vs investing in another property or investing in another asset class altogether.
So to calculate our monthly income, well, we want to add up all of our income. That would be gross rents, parking fees, pet rent, storage, or even coins from laundry machines. Anything that is putting money into your pocket.
Next, to calculate our monthly expenses, we want to think really long and hard about everything you would be spending money on to own this property. We’re talking mortgage payments, taxes, insurance, utilities – if your tenants aren’t paying for them, HOA fees, property management fees, and reserve funds for capital expenditures and vacancies.
Next, to calculate our cash flow, we simply take our Monthly Income – Monthly Expenses and that will give us our monthly cash flow.
To calculate our cash-on-cash return, we’ll first want to turn our cash flow into an annual metric as most investment returns are evaluated on an annual basis. So take your cash flow and multiply by 12 for our 12 months in the year.
Then, we need to know how much money we put into the deal. How much was the down payment, closing costs, lender points, rehab, etc.
Then, we’ll want to plug our numbers into the formula: Annual Cash Flow / Total Investment = Cash-on-Cash Return
Once we have our cash-on-cash return, compare it to other investment opportunities you may have and see how it stacks up! Real estate is an amazing investment but not all deals are great investments, so if you’re only earning 3% cash-on-cash return on a rental property and could be getting 8% in the stock market, think about your investing goals, and what makes the most sense for you. Maybe you’re okay with a lower cash-on-cash return because you’re also investing for appreciation!
American entrepreneur Jesse Jones said, “I have always liked real estate; farm land, pasture land, timber land and city property. I have had experience with all of them. I guess I just naturally like ‘the good Earth,’ the foundation of all our wealth.”
Thanks for reading the blog on our 4 Step Check! Of course, there are other factors to consider when making an investment in a rental property, but this is a great place to start! So go out there and be a savvy investor!