How to analyze rental property, then you can understand the numbers that I did not create Fosquare system but I copied it from two real estate investors whom I really respect and really successful. If they already know what they are doing and do not want to redesign the wheel, then this is the easiest way for a novice or beginner to really understand all four components of a real estate transaction, so I jump right into the numbers and I do not want to waste anyone’s time. So as you can see in our first square we have what is called its revenue.
The income is very clear. This means that many people think that the money generated by the property comes from rental income and obviously it will be your biggest source of income. But if you have a machine that runs on coins or you have a washing machine, it can be a source of income that you can rent. Garage Mont Whether it is a car or for storage you can rent it and increase your income that way and then there are many different ways someone can earn income property and some of them are some of them we take the hypothetical number I live In northeastern Ohio. You can get a cheaper duplex here.
I’m hypothetical, I ‘m in a B-class suburb, so let’s say you can get a duplex for $ 200,000. Investors like to call it one thousand dollars per side or door, so two thousand dollars a month and I think the rental income is simple because we do not have a washing machine. Garage comes with real estate. . So the total monthly income that this property brings in is $ 2,000 a month and now there are clearly costs that are the opposite of income so what are some of the expenses you may have to incur, then you can be taxed. There is a tax on property. There will be insurance. Will be your utility, so utilities include things like gas water drainage and garbage.
HOA stands for HOA Homeowners Association. These are usually monthly or annual fees for public area care. In this example we are pretending that this house is a permanent house that is not in the HOA. So you can do other landscaping or snow removal. You may have a vacancy factor. So the vacancy factor is usually used by five percent of people I use it for this example but the vacancy factor should be assumed that you know a little bit of the year, you will not get the full amount you rented because there is no tenant in that house.
If you find you have a repair we have caps, so Calf X is for capital costs and these are usually the savings you will incur in the long run, such as roof replacement or track replacement. You know that the roof is not always replaced. Every year but you know that after 20 to 30 years it needs to be replaced. So think of this as something like a savings account for real estate. In the end we get advice on real estate management which is usually 10% of your gross rent and you end up with a mortgage or loan service. So I will give realistic numbers for each of them. One hundred and fifty dollars of insurance would be exactly $ 100.
The thing with utilities is that there are many of them but you can actually put it to the tenants and the tenant is responsible for that. They actually pay the rent to live on the property and of course you can transfer them to why you are going to put utilities in your name and you are responsible for it and it is usually a big motivation if there are utilities it makes sense if their name affects their debts, so we As mentioned in this lease agreement, we will use the utility for the tenants, so as I mentioned earlier this house will be zero. It is a homeowners’ association that will zero in on everything you can actually rent that is responsible for landscaping and snow removal and lawn mowing and the tenant. Like I said the vacancy factor we are going to use approximately 5 percent and the vacancy factor of 5 percent out of $ 1,000. I’m sorry about that.
Five-fifths of $ 2,000 regrets it. The month you know someone needs a hole in a drywall or something in the bathroom, we usually make every account for a hundred rupees to make repairs. Now Capex this will be $ 100 and this is not a number made of stone but you can put this aside as there could be some error in the property with X force again for years, so the property managers charge property management 10% of the gross rent as I said 10% of Rs.2,000 is Rs.200 and I like to call loan service like mortgage or investor what I did.
I acquired the hypothetical property for $ 200,000. Let’s get a mortgage. So when I have a 30-year mortgage at 5% $ 160,000, it will be about $ 860 a month. So I went a little higher than the 5% interest rate.I did 5% because we know that interest rates are going up to make future evidence, so if we add up all these costs we get a total monthly amount. The figure of sixteen hundred and ten dollars is a good estimate based on all of this, and most of it is contained because they are leased. Some of these are estimates such as Capex and repairs and we also know property management. And the mortgage is a number made of stones, so 16 10 is a good estimate for the cost, so let’s go to the next square in our four squares system.
The third square we have is called the cash flow. This is to see how much the property is worth. This is very simple to either make or lose in a month. All you do is you know the income is $ 2,000 per month and we know that the income from the income square is $ 1610 as your expenses are us. A very simple number r $ 390 a month Positive cash flow is a very simple way to come up with that number and how do you know if $ 390 a month is a good investment or even worth your time? The return we bring to our fourth square is called a return on money to invest in these types of homes or investments of this kind, so this method of calculation is essentially money on cash because it means that you have invested money that you have earned with money.
Cash is cash on returns, so let’s find out how much money we have in this transaction. Let’s start with the payments we need to make to see if even the cash flow of three hundred and ninety dollars a month is worth it. We put in forty thousand dollars for the mortgage. Our final cost is the second factor and so we never talked about how much it would actually cost to acquire this property. So the cost of closing is the title work that any commission deals with and we are not really going to deal with a commission because we are the buyer of the RIL estate agent, so the seller actually pays most of them but this you tore things like the origin of the mortgage It may be that you know the title work paper loan fees.
So let’s assume this final cost is three thousand dollars. The next line item is the renovation budget, so let’s not say these properties aren’t perfect or the tenants aren’t ready I would say these properties should be perfect for these people to live in but they should be fit and safe good property for a family or person to live in. With all that, let’s take a rehabilitation budget. Let’s say these properties require thirty for each door. Five hundred rupees it was seven thousand dollars and the renovation we did a few floors and maybe we did something for the bathroom or the kitchen. It all depends on the fact that we have a rehabilitation fee of seven thousand dollars.
If you’ve wondered what else you want to do with the property or if you’ve spent and kept it simple for this example, we would say these are zero dollars, so the amount of money we have is $ 50,000 and I have no room to write this in mind. Keep in mind that all costs are combined forty and a third plus seven. Now all you have to do is take it to Fourth Square or three hundred to find a refund. Ninety dollars a month is ok, I think you can still see these 390 a month and so you will want to find out what you do throughout the year, so this is an annual refund 390 times twelve four hundred six hundred and eighty dollars a year are now good ones in math Some people already know what the next step is.
So what you do is you take this money you earn in a year so this is what you do by dividing what you do into forty eighty is the right amount of money to get it back, when divided by these forty eighty 50k all the money we used here is actually three out of nine points Gives a return of 6 percent. So how do we know if a nine-point six-six is a good deal? Good money on monetary returns I compare it to other investments available at the time, so look at your savings account in the money market now and you will most likely be one point five percent. Looking at the stock market, the stock market has historically returned about ten percent.
It has been more than a few years. This is comparable to the average in the stock market as it is much lower if you want to get into something a little more risky you obviously have to compensate for that risk. So the higher the risk the higher the return if you number here and you do Keep good property management and good tenants. This is a good number for a relatively low risk investment with no big turnover and you will be compensated for that risk with a nine point return rate of six percent The final factor that Fosquare does not address is that we did not buy this duplex for $ 200,000. Or we didn’t talk about how much it would sell. If so, this duplex, worth $ 300,000 in five years, will now move to a different metric called our IRR.
As a landlord we want to increase that rent so you know 2 3 4 percent every year and the difference in the shares of what you bought is $ 200,000 and when you sold it it was $ 300. So after all the real estate fees and all the good things you take, appreciate the cash flow and that equality and that number will go up by more than nine points over time but if you sell it that number may go down as well. Or the duplex will have to sell for less than $ 200,000. I believe everyone will get good value from this video because of the feeling. This is my first real estate investment video but I have three units. I have a duplex and a single family.
I used this for my numbers. Slightly modern like a spreadsheet but this is a good way for new investors to really dig into the numbers and see if an investment is profitable. If you found any value in this video please share this with one friend if your tenant is a piece of trash and he has not paid rent for three months and he is already and most importantly a prosperous day and another expense because he is milking the invoita process subscribe Be. Again la ndlord is not friendly and it is not only the income you get from the property but also the court fees legal fees legal fees you just love not investing in real estate.