Real Estate Deal Analysis – The 5 Key Numbers You Need To Know
There is a saying in real estate, “you make your money when you buy.” Proper real estate deal analysis is key to your success. If you buy right, the rest is downhill.
When it comes to investing in real estate investing, make sure you have the right profit expectations in mind. If the house is very near perfect and in a great location, expect lower returns on investment for the first 5 years or more. The houses you will make the most short-term money on are the ugly ones in decent neighborhoods. You will have to decide for yourself how ugly and in what type of neighborhoods you have a risk tolerance for.
First, Focus On A Few Key Numbers
Once you have identified the “ugly” house you will need to know the ARV (After Repaired Value), the rent comps, expenses, mortgage payment, and repair costs. Those are the key inputs to first focus on before running the real estate deal analysis.
The ARV is how much the property that you are interested in could be sold for after all the repairs were completed to bring it up to the standard of the neighborhood. This number can be determined by running the sales comps (comparative sales) on similar size houses in the neighborhood or similar adjacent neighborhoods. Make sure you or your real estate agent only go back 6 months. Appraisers cannot use comps going back further. The rent comps can be figured exactly the same way as the sales comps.
Expense estimates will need to be gathered for both monthly and yearly items. Monthly include: PITI (that is your mortgage Principal, Interest, Tax, and Insurance), property management if you want that service, and annual HOA fees. If you plan to keep the property longer than 2 years make sure to budget in for repairs and vacancies. Keep this money in an account for the possible event you have a gap in occupancy and for the minor repairs that come up from time to time.
Analyze Only a Few Key Numbers, Too Many Will Cause Analysis Paralysis
First, it goes without saying but I will…you need to know the asking price, what you are willing to offer and the ARV by running the comps. You can use either the asking price or your offer price to run the real estate deal analysis and get the following financial indicators.
1) COOP (Cash Out Of Pocket): COOP is how much of your own money (not financed/mortgaged) that you put into the deal. If you bought a property for $100K, put $20K down, had $2K for closing costs and $8K for repairs, then your COOP would be $30K.
2) Cash Flow: The Cash flow is [Rent – all expenses and the mortgage]
3) COCR (Cash on Cash Return): The COCR is [The annual cash flow / how much money out of pocket (not financed) was put into the deal]
4) Unrealized Equity Capture: The unrealized equity capture is the [ARV – purchase price – closing costs – repairs]
5) Return on Unrealized Equity Capture: The return on unrealized equity capture is [(Unrealized equity capture – COOP) / COOP]
That is it to start. If these numbers do not workout, the chances are you do not have a good deal. Remember, you are buying an ugly house so there must be equity in the deal after you have completed the rehab.
See this video explaining these key numbers and more using a tool called Zilculator.
Real Estate Deal Analysis - The Bottom Line
There are many other factors to look at when analyzing properties, but cash flow, COCR (Cash on Cash Return), unrealized equity capture, and return on unrealized equity capture are the keys to a good deal! Knowing your COOP (Cash Out Of Pocket) ahead of time will let you know if you can afford the deal in the first place.
If the real estate analysis numbers look good, then you should go out to physically walk the property for a closer look. Your estimated repairs will likely be adjusted after this visit. Rerun your numbers again to see if the deal still make sense for you. If so, move forward and move quickly. Good deals do not last long.
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