Next, we’re going to go over some financial calculations and get into the real nitty-gritty detail.
We’re going to use some Proformas that is good for smaller properties, all the way up to one that’s great for large properties. We’re also going to throw in a blended-rate calculator which allows you to determine how a particular real estate investment measures up to other forms of investment like stocks, bonds, and mutual funds.
If you’re already a real estate agent, this is awesome stuff to put in your arsenal to make available to your own future investors. These tools are not mine. I don’t own them. In some cases, I’ve had an influence on them and helped create some of them, but others I’ve just discovered through hard work.
Let’s go back here. $121,256. 20 percent down. Let’s see if we get more info here. Let’s assume 25 percent out. Cool. I love technology. This is working.
Interest rate, are you still getting 4.5 percent? I know that they’re on the way up but I know some commercial guys with 4.75. Awesome! Good deal. You guys are good.
Gross monthly rent income. Do you know what your gross monthly rental income is on this property, Jason? I’ll give you a second to key that in.
Let’s see, nothing there yet. Oh, $2,700. Okay, and let’s see, in property improvements, initial expenditures to get ready for rental. Do you know that that is? Zero! Okay, just leave that zero.
Sales price, this is if you actually sell it. I think they assume a five-year sale. Land value, I’m going to say is five percent. Property tax, let’s say 2.5 percent.
Now open the detail and investment performance tables. Let’s look at some of these assumptions.
Assumptions, loan term. Are you doing a 20-year term or a 30-year term? We’ll assume buying cost is one percent. 20-year, awesome.
Other assumptions. Vacancy rate, that is way too high. Even my big apartment complex in Whitehall I have a waiting list for people to get in there. I would say it’s no longer even five percent. It’s probably well below three percent.
Oh, you want to leave vacancies at eight? If we want to leave vacancy at eight, I’ll leave it at eight. Rent increase of four percent. Vacancies, that’s high. We’ve got to talk about that. If that’s standard for you, we’ve got to talk about that.
Operating cost assumptions, property management, let’s leave that at 10 percent. Maintenance, let’s see here. We need to have loan term at 240 months. Sorry, that was supposed to be 20 years. 240 months not 20. Zero percent property management.
Okay, let’s go down here. Did I expand all these assumptions? So far I did. Let’s look at this right here. Selling commission, six percent. Annual appreciation four percent. Let’s leave those there.
Assumptions on taxes, inflation and return assumptions. Let’s see, what’s this? $500 per year per unit, $2,500. Is that your maintenance and repairs? That must be maintenance and repairs. Let’s make that $2,500 then.
So far, so good. Okay, good. Let me go back down here. Tax rate, I don’t know what you guys are at. I’ll just leave it at 25 percent. Capital gains, let’s leave it at 15 percent. Lord knows where that’s going.
Cost of inflation, that’s probably fair right now. Investment and hurdle rate, that’s annual rate in comparison to other investments. Let’s just leave that alone for the moment. Let’s see what else we have here.
Let’s click and see what we get. Okay, so when it’s all sliced and diced at the end of the day, you can see here, obviously the first year you’re not going to make any money, essentially because you put money into it. You made a down payment. But if you didn’t make a down payment you obviously would have cash flow.
And you can see clearly you’re cash flowing in the subsequent years. And your rents go up, so cash flow goes up. And you guys are making money and you’re happy campers. Eventually you do sell. You’ve got some selling costs here.
But you pay off your mortgage and you’ve got your total annual cash flow. You can see your return on investment goes up year after year. Let’s see, walk away price, that’s a break-even price between renting and selling. That’s $175,000.
Hang on one second, there’s a question here. Is that for one calendar year or fiscal year?
I would say that’s one calendar year. Initially I would assume that. It doesn’t say otherwise, because we didn’t put what month we’re plugging that in. Let’s just assume it’s one year.
Because you were putting $20,000 or something like that. Let’s see here. Down payment: $30,000 actually. That’s right, $30,000. So there you go: $30,314. That’s it.
Why does it jump so high from year four to year five in total cash flow? I think that’s probably cumulative. Because you’re selling.
Let’s see, 14.5, 13.5, so that’s about $28,000. That’s about $40,000. That’s about $50,000 and then some change. Then you factor in the last year, $50,000 plus another $17,000 or so.
So this is cumulative. This is this year’s cash flow. The $68,000 equals of these other cash flows, plus the final year cash flow. I’m almost positive. It doesn’t tell me that explicitly, but when I do the math in my head, that’s what I come up with here.
So ultimately the big value of this calculator is, is you’re looking to see what your total return would be in terms that you can compare to other forms of investment.
So in other words, you’re not just looking at cash flow in income minus expense. You’re looking at also an eventual sale. What happens if you eventually sell it, because you make money that way too.
You have the depreciation you have to factor in. You have to recapture that depreciation. You’ve got equity buy-down because your mortgages are always being paid every year because your tenants are paying it for you.
But let me just go down here. So cash and sale proceeds is $53,000. That’s if you get the price you’re wanting. Let’ see, another question. Is the 175K the break-even amount? Yeah.
I think the reason they say it that way, obviously it’s not break-even because you only had $120,000 into it. But I think what they’re saying here is if you factor in the cash flow.
When you’re selling a property, when you’re selling an income-producing asset, if you think about it, you’re not just selling the asset. You’re selling the income stream.
This is why this blended rate return can be so important, but also sometimes hard to understand. If you think about the way notes get bought and sold, the value of a note on a mortgage is the value of its future cash flow.
And it has to be discounted to whoever is buying that future cash flow. Otherwise they wouldn’t buy it. They’re not going to pay full price on a note when that note has already had some cash flow paid out on it. In other words, it’s being amortized, typically.
And the current owner has already received benefit from it. So you’re discounting what has already been taken out or paid out on that loan. But at the same time you’re providing a future cash flow. So you have to think of that in terms of the rental property.
People are looking at it. You have to look at it in terms of buying a cash flow. Because if you look at other investments like stocks, bonds, CDs, T bills, they provide cash flow.
So that’s why you factor in the cash flow into the sales price here. That’s why it’s very important to do that. Because if you just say, “I’ll sell it for $150,000 because I only put $125,000 into it, it’s been a few years, I’m happy I paid it down to $100,000. I get $50,000.”
You may feel good and be happy, but you may have also left money on the table. You need to factor in the cash flow. Now obviously, when you’re talking about a duplex, this may not weigh as heavily.
Because a duplex is going to be more influenced by sales of single-family homes! But a 20-unit building, you’d better believe it’s going to be all about the cash flow. And you need to factor in that more heavily compared to other sales in the area.
That’s why that’s important. You’ve got a five-unit there, you’re right on the line. That five-unit is right exactly on the line. So I project a sale on a five-unit based on maybe appreciation of the building itself, relative to other properties.
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