Running The Numbers

Every investor has to learn how to Run the Numbers before they jump into buying a property. Otherwise how do you know if you have a good deal on your hands or one that you should pass on. This blog is going to teach you how to get the numbers and how to analyze your deals to put you in a position where you have options. The options to sell the property for a quick profit or hold the property and rent it for positive cash flow each month.

Initial analysis of a deal is quick and dirty. You get a few rough estimates of important numbers and run them through a few simple equations and these will tell you directly if you have a good deal or a bad deal. This will take some of the guess work out of investing.

The first number you need is the price tag. How much is the seller asking for? Lets say we found a motivated seller who wants to sell his house to us for $30,000. Next you will need an estimate on renovations. Let's say you had a contractor come to the house and he gave you an estimate of $40,000 worth of work to do. The next number is the After Repaired Value (ARV). You find this number by calling a Realtor and asking for comparables on your property. Our Realtor has said our property is worth $100,000.

(Asking Price + Cost of Renovations)/ARV = Cost to Value Ratio (CTV)
($30,000+$40,000)/100,000 = 70%

The lower the CTV the more instant equity that is received upon signing the deal. This deal indicates that the buyer receives $30,000 in equity, that is to say, there is an equity spread on this deal of $30,000. Typically an investor looks for a CTV of 65% -75%. Properties with this type of CTV can be flipped for a quick profit because after renovations the property will be worth $30,000 more than what you paid for it.

Next you want to do a Cash Flow analysis of the property. How much do you think you'll charge the tenant for renting your house? Look on craigslist to see how much apartments are renting for in the area. I do student housing renovations and assume $500 per bedroom for the Gross monthly income. Let's assume for our property that the Gross Monthly Income is $1500 per month.

Cash Flow Cash Cow Rule

(Gross Monthly Income)/(Asking Price + Cost of Renovations) > 2%
$1500/(30,000 + 40,000) = 2.1%

That is to say, The Gross Monthly Income divided by the total cost of the property must be greater than 2%.

When you find a property with CTV lower than 75% and that satisfies the Cash Flow Cash Cow Rule you know you have a true deal on your hands.