How I Compare Real Estate Deals

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       Hey everyone, how are you doing today? I was talking with a friend about real estate investing and comparing deals, and I was really trying to help them understand the simple math behind how I compare deals. But it wasn’t clicking. So I told him what I would do is go back and I try to create a video for him that could be shared with everyone. We kind of call it a quiz, you know. Can you do the math guy, can you figure it out? So I built a real simple quiz: Can you calculate the return? Then I actually break down my spreadsheet in detail so you can see exactly how I do it, kind of in three phases. I broke the spreadsheet down.

      You’re going to get a sample of the deal, a spreadsheet that I use and still use today. This is in my course, so only my students get this. But we’re going to sort of break it down because again, I’m here to help. I don’t think math should be the problem. I don’t want math to scare you or freak you out. I’m not one of those people that try to crush you with this huge spreadsheet. I think people do that, I just don’t know why they do it. I guess they think that the more complex the better it is. However, I think there’s too many variables sometimes and that’s not always the way to go. So we’re going to give you two questions just to see if you can run the basic math.

      After that, we’re going to break my spreadsheet down in detail and then we’re going to see if you have any questions. I will be sharing a PowerPoint just because I found that to be the best for numbers so you can stop the video whenever you’d would like, so I’m going to call this a quiz. Hopefully that doesn’t scare you, right? I was just gonna say there’s no right or wrong answers, but it’s math. So there is right and wrong answers, but we’ll go from there. No harm, no foul. Let’s get started- so can you earn 6% a yield or return on this house and this just happens to be a house that I think has actually been flipped and sold. I’ve done some walkthrough videos on it anyways. It’s just a stock picture. Right? So if you were going to earn 6%, what would you need to know? What do you think you would need to know? Well, obviously purchase price would be helpful, as well as rent because you need income. What are the monthly expenses, right? From mortgage payments to property management, to insurance, taxes, reserves, and all of that stuff.

      Anything else you think you’d need to know? Well, one of the things that you’ll see in my calculations is how much cash did you put down. I don’t just mean the deposit or a down payment, but it’s closing costs and it’s also make ready. This house here is what you call pride of ownership. So make ready a zero. But what if this house was 200k and needed 30k in work? You should include the 30k because it’s how much cash do you need to put down to own and have a functioning or producing asset? If you put 50k down and it needs 30k in work, you have to calculate $80,000 in that example. The down payment plus make-ready costs and closing costs, which for this example we’ll just assume are zero.

      In reality, they often run about $2,000. Let’s take a look at what we’re doing. We’re gonna play a game. We’re going to call it the, “What If” game. Let’s say this house (the one we just saw) cost you 200k. You put $50,000 down whether that’s for the down payment, closing costs, make-ready, right? If 50k went out of your account, how much estimated yearly cash flow do you need to be able to earn 6%? Maybe stop the video here if you want to try to take your calculator out or your phone and do the math. Again, you’ve spent $50,000 out of pocket. So how much cash do you need to earn to earn 6% again. Stop the video because I’m going to give you the answer.

      The answer is $3,000. You simply take 6% times 50k and that will give you $3,000. Then what you do is you take $3,000 divided by 12 because rentals produce net income every month. So you would need to have net $250 a month in this example if your only question was, “I have to spend 50k and I want to make 6%, how do I do that?” That means subtracting all costs, mortgage payment, property management, taxes, insurance reserves, all those things. You have to net $250 every month to earn a 6% yield in this case.

      Now let’s try a different one. Let’s say in this case the house costs 150k. Your out of pocket is 40k what is your estimated yield if the monthly cashflow is 150 right? After all expenses, mortgage payments, taxes, insurance, reserves, utilities, whatever it is for you, if you’ve calculated your net at 150 what is your yield? Again, stop the video if you want to do the math, but here’s the answer: First off, you take the 150 times 12 right? Cause you want to get a yearly number. So that’s 1,800. Then, you take 1,800 divided by 40,000 which was your out-of-pocket, and that is going to give you a decimal or a reading of 0.045. Turn that into a percentage by multiplying by 100% and you get 4.5% in this case. We took the estimated cash flow and calculated our yield. In the earlier example we’re saying, “Hey, if I’m putting this out there, how much cashflow do I need?” So again, these are all just examples that you should be comfortable with, but let me break down the spreadsheet for you. The reality is, I use this spreadsheet to compare all of my deals. My spreadsheets are very simple. I use this to compare a one bedroom house with a 20-unit apartment building.

      I still use this exact spreadsheet today. I believe a lot of people over-complicate spreadsheets and how to compare deals. It’s very easy to do. Excel is very, very powerful and there is so much vocabulary in real estate that you can easily add too much. I believe it’s a very simple thing, it’s just how much of my cash goes out and how much cash comes back. That’s how my simple mind works. When you follow my model and start playing with it in your market, you’ll get to understand which variables have the biggest impact on your return. Often it’s pretty surprising. You will see sometimes that cheap properties have a downside because they consume too much cash and they’d just drive down your yield. So here’s the spreadsheet, I broke it into three parts because frankly, the font was too small.

      If I had it all on one sheet, my first portion would be how much cash is required. Just breaking it down left to right. I usually put a street name just so I can identify it. I talk about the property type (again, not required but I put it in there). What’s the price? Usually I start with what’s the asking price and then I play with my numbers and I come back to what I can offer, but let’s just say a price down payment. I’ve assumed 30% in this example for repair costs, I’m assuming it’s turnkey or ready to go. I’ve assumed closing cost of $2,000. And then that’s just a cumulation of total cash in this case, 39,500 for this one bedroom house costing 125. When you’re a student of mine, you play with this, you get the spreadsheet, a d it all becomes second nature because you’ll be walked through it video after video.

      Now here’s the next portion of the spreadsheet: Expenses. Because again, we are trying to get to a net number. So you’re going to have a mortgage payment, you’re going to have taxes and insurance, and you’re going to have property management. It could be zero. If you self-manage you’re going to have expenses and reserves and your basic, you know, add what makes sense, right? I never owned anything that has snow, but if you have snow removal or yard or whatever, add those things. You want to have reserves, you want to budget for things, because this is going to be a model that you run to get monthly expenses. And then the final one is sort of where it all comes to bear. We go after and get the monthly rent.

      We calculate the monthly cashflow which is a rent minus all of those expenses from the previous slide. I do turn that into a yearly cashflow number because that’s how I compare things. I take a monthly cashflow times 12 and then there’s the yield. It’s yearly cash flow divided by out-of-pocket cash, which you saw in here. In this case, total cash was $39,500, so that’s how this yield happens. In the end, students learn how to leverage this simple deal spreadsheet and the same one I use for all my deals, they now get to model the spreadsheet to their own market. I’ve been very clear, I only know one market of any depth, but they’ll get to put in their rents, their interest rates, their property management fees, all of their expenses. The spreadsheet does become theirs because it’s now modeled for their business in their markets.

      The whole goal of the course in section two is to understand how yield is impacted by adjusting other variables. Does mortgage payment truly have my mortgage interest? Does going from 4 to 3.9 have a huge impact on your yield compared to $10,000 less of make-ready? No, the $10,000 will have a bigger impact on yield because that’s real cash. A savings of whatever it was, 0.3% on mortgage rate. We’ll bring your mortgage payment down, increased cashflow, and what would that be? Maybe $20, $30 a month. So it doesn’t really impact it as much. A lot of times people get aha moments when they go in and understand what really impacts yield. Again, I can’t say this enough, I use this for yield calculations too. Go after one bedroom houses, right? Small, 600 square feet, all the way up to 20-unit apartment buildings.

       I’m only interested in how hard my cash is working. If you buy a cheap property that needs 30k, you must calculate and leverage that 30k as well because that cash is going out. As I document in our book, that was a big mistake I made in the beginning because I wasn’t appreciating the cash. I started just by understanding the down payment, but including make-ready costs is an important factor that I certainly missed my first year of investing. Expected yearly cashflow is the thing, it’s the return. It’s how hard is your cash working, and in my opinion, that’s the only thing that matters. Sometimes a small house is best. Sometimes it’s a fourplex and sometimes it’s an apartment. I could tell you today in my market, it’s not apartments and fourplexes and houses are the best investment today.

      That could always change going forward. I started using this model 15 years ago and I’ve used it in the upmarket, I’ve used it in a downmarket and I’m using it today as well. I believe that yield, what I use to compare deals is the great equalizer because yield will tell me and tell my students how hard their cash is working. That’s how I compare deals. It’s simple. Maybe you were hoping it was more complicated than that, but it’s not. I am curious, how do you compare deals? When you’re looking at five different things that you could buy, what do you use? Is it price per square foot? Is it gross rent multiplier? Is it cap rate? What do you use? I’m always curious to see what people use. Hopefully, that made sense. Again, I do really believe that the math should not be the hardest part of real estate investing.

      I try to keep it simple. I use this every day, so hopefully, that made sense. I’d love to hear from you. What do you use? If you have any questions about this, let me know. Remember, if you get the course use the coupon code book BOOK20, so you get $20 off and an autographed book. In conclusion, the math shouldn’t be the problem. You need to learn your market, you need to consistently look at it and then the math just becomes second nature. So hopefully that makes sense. Let me know what you think. Take care, and have fun.

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