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SHOW NOTES FOR EPISODE 596: KNOWING YOUR NUMBERS
There are lots of numbers you need to know in real estate investing to be truly effective and successful. Almost everything you will do in real estate investing is based on numbers. In today’s podcast, Bill shares what those numbers are and how you can learn to master those numbers for real estate investing success.
Knowing Your Numbers
I hope you are enjoying our series, Ten Steps to Real Estate Investing Success.
If you have been following along since the first episode, you should know if real estate investing is for you and, if you think it is, you should be considering what type of investing you want to do (flipping, rental properties, passive syndication, etc.). In today’s episode, you are going to learn about the numbers you need to know to be successful. Here are the previous episodes if you missed an episode or want to reference back to those episodes:
- 590: Is Real Estate Investing For You?
- 592: What Type of Real Estate Investing is For You?
- 594: Building a Winning REI Strategy!
Please, if you have any questions or want more info on any of the episode topics, just let us know.
Introduction
Now it’s time to roll-up your sleeves and start learning the trade, so to speak
Today’s episode is entitled “Knowing Your Numbers.”
There are lots of numbers you need to know in real estate investing to be truly effective and successful. Everything you will do in real estate investing is based on numbers. The more efficient you are in determining and deciphering numbers, the better deals you will get involved in. Ultimately, better deals will result in higher profits and more money. Running numbers is much more than knowing how to plug numbers into a calculator. You need to know economic conditions, markets, costs, expenses, projections and estimations. If you overlook even one item, it will have an effect on everything else associated with the deal. Learning what numbers to look for on every deal takes time, but it is the most critical aspect of the business.
There are many good spreadsheets and programs that can help you run the numbers, but you have to put the right numbers in. Many times an investor will overlook all of the expenses involved in a rehab deal, for example, and when they walk away with much less than they anticipated, they are shocked and disappointed. Everything from taxes, insurance, utilities and other holding costs have to be accounted for. You can get a great deal on the buy side and have an end buyer lined up, but in order to know what number to sell for you need to be accurate with all of your numbers.
In order to get comfortable with the numbers, you need to look at every step of the process. If, for example, you are an active investor, start with the property and look at comparable sales or listings. See what the subject property has that ones in the area may or may not. This is an exercise you can practice whether you have deals pending or not. Your realtor or broker should be able to provide you with a listing sheet that will have all of the pertinent information about the property. This will help you down the road, as you will know what to look for on the buy side and what you may be able to sell for.
From there you can move onto specific expenses related to the property. Look at your spreadsheet or program as a guide, but also talk to your realtor/broker and fellow investors who are in the business. Ask questions (lots of questions) about every expense until you know what they are for and if they are justified. Even take a walk around Home Depot, Lowes or any other home improvement store and get an idea of just how much certain items cost. You may not know what to do with some of the materials, but at least you will know their cost will be.
Finally, take a look a close look at seemingly miscellaneous expenses such as commission and other closing costs. If you have ever closed a real estate deal, go back and look at the HUD 1 settlement statement. This will have all of the costs and expenses from the closing broken down and easy to read. These costs will often come as a shock at the closing if you do not know exactly what they are and how much they cost. Tax escrows, attorney fees, lender fees and insurance costs can add up very quickly.
Knowing what the numbers are, where they come from and what they will be moving forward is the backbone of a successful real estate investing business. The best investors know this and constantly look for situations with these numbers in their favor.
Great Sources of Free Spreadsheets:
- https://www.biggerpockets.com/investment-calculators
- https://lonestarcapgroup.ac-page.com/model-giveaway
Numbers You Need to Know
So let’s take a look at some of the common numbers you will need to know.
The Economy
You don’t have to be an economist, but you do need have an understanding of the global, national, state and local economies and how they affect your investing.
The economy is based on supply and demand. Understanding that as it pertains to the housing market is critical. It’s also important to look at things like our supply chain (where we are having significant shortages today) – if, for example certain building/construction supplies are limited that could seriously impact your rehab and construction costs.
Good info on Housing Economics: https://www.nahb.org/news-and-economics/housing-economics
Market Analysis
If you are trying to figure out where to invest, you will need to understand the numbers associated with analyzing markets.
I’m always looking for “emerging markets” – because I have focused on rental income, when I buy a rental property, I want to know that I will first be receiving a health cash flow as well as purchasing a property that will increase in value over time. If you don’t know what an emerging market is, I’ll be including podcast links to shows where I go into more detail on this process.
Looking at a market’s population growth, jobs, unemployment rate, development activities, planning commission data, info on major companies moving into an area, Price-to-income ratio, Price-to-Rent ratiosetc. are just a few of the key metrics you will analyze in a potential market.
One of the best sources for market analysis info: https://www.census.gov/
Property Analysis
Whether you are an active investor, for example, buying rental properties, or a passive investor, investing in apartment syndications, you will need to understand how to analyze properties.
Key numbers you’ll need to know include:
- Property Price
- Rental Income
- Price to Rent Ratio
- Cash Flow
- Cap Rate
- Cash-on-Cash Return
- Return-on-Investment
- Appreciation
Rental Property Monthly Expenses You Need to
- Monthly mortgage
- Property Taxes
- Insurance
- HOA
- Vacancies
- Legal
- Turn-over expenses
- Property Management fees
- Accounting, travel & administrative fees
- Repairs
- Maintenance
- Landscaping/lawns
- Snow related: shovel and salt
Other Key Number to Know
- Financing related numbers
- Interest rates (fixed and variable)
- Points
- Rates tied to indexes
- Loan-to-value Ratio (LTV)
- Down payments
- Appraisal fees
- Closing Costs
- For Flippers
- APV (After Repair Value)
- Renovation Costs
- Carrying costs
- Reserves
- Very important, especially if you are investing in “C Class” properties
I know I’m spending a lot of time on Rental Property numbers but that really is the most popular form of real estate investing.
Back of the Envelope Analysis
And making decisions quickly is important because buying good deals is a numbers game. You must look at a lot of losers before you find a winner.
When I began investing, a smart teacher told me that I would need to look at and analyze 100 properties before my initial real estate investing lessons could really soak in. After looking at and analyzing thousands of properties myself, I know the teacher was right!
So, if you want to improve your skills as an investor, the 100 property exercise would be a smart place to start. It will give you an opportunity to practice running these back-of-the-envelope numbers, and you might even stumble upon a deal along the way!
Back of the Envelope Numbers
Basically looking at Income & Equity
Income:
- Gross Rent Multiplier (GRM)
- The 1% Rule
- Cap Rate
- Net Operating Income (NOI)
- 50% Rule
- Net Income (After Financing)
Other Reference Links:
Equity:
Equity=Value-Mortgage Balance=Equity
BOE analysis process in a nutshell:
- Find a potential property to evaluate
- Study current market rents and current operating expenses (or for quick analysis use the 50% rule)
- Create a snapshot of the property’s income by calculating:
- the Gross Rent Multiplier (GRM)
- 1% rule
- Cap Rate
- Net Income After Financing
- Cash-on-Cash Return (ConC)
- Study comparable sales in order to estimate the current value or the After Repair Value (ARV)
- Create a snapshot of equity by calculating:
- Current equity (Full value – debt balance)
- Future equity (Full value – future debt balance)
Now, you have numbers scribbled on your envelope.
Podcasts on Analysis
- 561: Effective Underwriting for Multifamily Properties
- 550: The Basics of Real Estate Investment Analysis
- 438: Must Know Key Ratios for Quick Property Analysis
- 191: Rental Property Analysis Simplified With Frank Gallinelli
- 169: Real Estate Investing Success Through Great Timing and Effective Deal Analysis
- 036: Analyzing Rental Properties – Part 1
- 040: Analyzing Rental Properties – Part 2
- 042: Analyzing Rental Properties – Part 3
- 566: How to Quickly Assess a Small Multifamily Deal
In Conclusion
Because of time limitations, I wasn’t able to provide the formulas to calculate ratios, rules of thumb, etc., but I will be providing links that will take you to podcasts or blog articles that will extrapolate on most of the numbers discussed. For example, if you aren’t familiar let’s say with cap rates, there will be a show/article that explains why that cap rates are important and how to calculate and apply cap rates in your property analysis.
If all these numbers and acronyms sound like alphabet soup, remember: You don’t need to use every single ratio or metric. Focus on the ones most relevant to your investing goals.
Most of all, remember that your calculations are only as good as the numbers you plug into them. Do your homework and get accurate figures for expenses like repair costs or vacancy rates and revenue figures like ARV or market rent.
When evaluating a potential investment, your job is to get a well-rounded sense of its returns. Don’t stop at simplistic numbers like GRM; go deeper to calculate monthly cash flow and cash-on-cash return.
Well, I hope that helps you
Other References:
- https://www.mashvisor.com/blog/real-estate-numbers/
- https://www.coachcarson.com/run-the-numbers-investment-properties/
- https://www.renterswarehouse.com/education/numbers-you-should-be-running-on-every-property
- https://www.moneycrashers.com/real-estate-investing-deals-numbers/
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