How To Analyze a Deal

Everyone has their own way of deciding whether or not they are going to purchase a property.

Today I am going to show you how successful real estate investors analyze buy & hold deals!

(Here’s a hint: it’s all about the numbers!)

There are many ways to skin a cat, but we’ll be looking at our analysis from a Cash Flow investor’s perspective.

The Most basic formulas YOU need to understand are these:

• Total Income – Total Expenses = Net Operating Income (NOI)
• NOI – Profit = Maximum Debt Service Payment

Now, let’s define some of the terms:

• Total income – Gross Monthly rents and any other income the property generates (laundry or cellphone towers)
• Total expenses – All of the monthly costs excluding debt service

But what are the expenses we should look at? All of them! (Here is the list I use)

1. Property Management – Account for this even if you self-manage. (You can’t scale without it & you shouldn’t work for free.) I use 10% of gross rents.
2. Vacancy – Account for this to cover the time your units are vacant. If I am unsure of the actual rate, I use 10%.
3. Maintenance – This is estimated based on the condition and age of the property. I use anywhere from 5-20%. I most commonly use 10%.
4. Property Tax – Annual property tax divided by 12. You can find this on your county/parrish tax assessor’s website or places like Zillow.com or Realtor.com.
5. Insurance – Call an insurance company or go online to get a quote for the property.
6. Utilities – Only account for this cost if the landlord pays. (water, sewer, garbage, electric, gas, etc.)
7. Other – All other expenses fall into this category (Landscaping, Snow removal, marketing, etc.)

Now that we know our total income and what to count for our total expenses, we can calculate our NOI.

Total Income – Total Expenses = NOI

• Profit – This is the desired amount of profit you have established in your deal criteria. (see defining your criteria)
• Maximum Debt Service Payment – This number represents the absolute most this deal can afford to pay toward a mortgage or loan.

NOI – Profit = Maximum Debt Service Payment

The next step in your deal analysis is to compare the Maximum Debt Service Payment to the actual mortgage cost. If the mortgage/loan cost is equal to or less than Maximum Debt Service Payment (and all of the other numbers are correct), you may have a deal.

After using the above formulas to “run the numbers,” you will know whether or not the deal will support itself.

To help me analyze properties more efficiently, I created a spreadsheet that does the calculations for me. You can download it by clicking here.

The last tip I will offer on how successful real estate investors analyze buy & hold deals is this,

“Trash In, Trash Out!”

It doesn’t matter how good your spreadsheet is or if you did your calculations correctly if the data you start with is inaccurate. To be successful at analyzing deals, you must gather the best possible numbers for your income and expenses.

If you have questions about deal analysis or real estate investing, please reach out to us. We can be contacted through our website, Facebook, or Instagram.