Wholesalers: How To Analyze Deals For Yo...

math problems Hey Moguls, we have a terrific lesson today from one of our newer Faculty Advisors, Mr. Rob Swanson.

You may remember Rob from this awesome training call, and this one and here too, but today he’s here to shed some light on how you, as a real estate investor, can analyze a rental property.

Just to remind of the awesomeness that is Rob… he’s an investor and expert in wholesaling, structuring deals, raising money and teaching real estate investors. As the President and CEO of The RMS Companies, Rob oversees the purchase, renovation and liquidation of residential real estate.

So, let the teaching begin!

From Rob Swanson…

What can you offer on a property if you want to resell that property to a landlord?

If faced with this scenario, would you know the answer?

Hey guys, it’s Rob, and I’m thrilled to be back here with you at Mogul today. More importantly, I want to be the guy to give you the tools, the process and a strategy to realize your actual maximum allowable offer on a given property.

As investors, one of the most important things we can do is determine return. How can we analyze properties, and do they fit with our overall business objectives? These questions are your main focus, and it all starts with the rents...

It’s a Simple Numbers Game

Your first step is to determine the appropriate rent for the property, and then establish the local “going” rents for that particular type of property. What’s the norm for a 2-bedroom or 1-bath house?

Once you know that number, you’re going to remember that 12 is your lucky number. Take that local, typical rent and multiply it by 12. That’s your annual rent.

I’m a visual person, and chances are most of you are too. So let me show you an example:

Monthly rent = $600 x 12 = $7,200 annual rent.

Pretty simple, right?

This annual rent is what the investor will collect, but here’s the key... this is what the landlord, your potential buyer, is going to collect, but now let’s talk net numbers.

To determine the net rent, we have to take out and account for:

Property Management
Taxes
Insurance
Maintenance
Vacancies

This is the actual amount that your investor will pocket at the year’s end.

How to Calculate Tax Savings Benefits

math The numbers get bigger here, but don’t panic. The math is still simple, and I’m all about simplicity.

Remember our numbers above? Let’s say your investor gets $7,200 in monthly gross rent. You’re going to estimate a 30% cost between the gross and net rent. This percentage will take the investor’s cash down to $5,040.

Still with me?

Now the question becomes, what kind of annualized return on investment does the landlord investor actually want? In my experience, most landlord investors will want between 8% and 12%. Compromise is always a good thing, so maybe run with 10%.

If your landlord invests all cash and gets a return of 10%, what's the maximum you could pay?

Well, that’s $5,000 divided by 10% or 0.1, which gives us $50,000. That’s what your all-cash paying investor will want to pay, all-in, to hit a 10% return on investment.

Don’t Forget about These Other Expenses

Be sure to take into consideration renovation costs…

How much will your investor need to spend to fix up a given property? If the property requires $8,000 in renovation costs, simply subtract that cost from the all-cash price:

$50,000 - $8,000 = $42,000

So in this scenario, $42,000 is the target price to your investor.

Now you know... you know that if your investor pays $42,000 and gets $600 a month, he or she is going to get about a 10% annualized return on investment.

And that’s how you go through the math process. Is it painful at times? Sure. But it’s simple, really, and it’s necessary. So get comfortable with the math, and remember that if we leverage the property, these numbers get better. If we account for taxes, these numbers get better.

That’s what I call a win/win.