One of the most important skills you can learn in real estate is deal analysis. Far too many investors have jumped into buying properties without enough due diligence.
Many times, the results ain’t pretty. Unfortunately, then it’s too late. You can’t go back to the store and return the item you just bought.
Deal analysis can be really boring. The type of person who takes risks and invests in real estate is often struck with some form of ‘Entrepreneurial Attention Deficit Disorder’ (look it up, it's a thing). Trying to sit down and focus when your mind’s running a million miles a minute is tough.
What you need is a tool. Some kind of guidance in doing the analysis for you. All you need to do is gather some information about the deal. Then you plug it into some software and voila! – you have all the analysis done for you.
Where to find a tool like that?
You can ask your CPA to make one up for you. Nah – too expensive.
You can make one up yourself. Meh. Remember the ADD thing?
Or you can find one that is ready to go...
Detailed Deal Analysis at the Click of a Mouse
There are several deal analysis software packages out there…
We found one that seems to cover everything an investor needs, all in one package. The company that makes it has a catchy name (not) – Real Estate Analysis Software LLC, but what do you expect from accountants?
If you head over to the Rental Software website, you will see they have two different types of deal analysis software – one for flipping and one for rental investing. The software looks like they created it out of Microsoft Excel, but don’t let that fool you. They have all kinds of features and calculations to help do your analysis for you.
Accountants who specialize in real estate investing developed the software, so it is compatible with all the latest and greatest accounting methods. They have been refining the software since 1993 and now have over 25,000 real estate investors using it.
Review of the Software and Deal Analysis
The flipping version of the software deals more with short-term analysis and detailed rehab costs. We will focus more on the rental side of the software for this lesson.
When you first open up the rental software, you will see the Home screen.
As you can see in the bottom left of the screen, the analysis software is based on the book ‘Real Estate Cash Flow Analysis,’ which, coincidentally was written by the creator of the software. The Home screen allows you to quickly and easily move to the area of your analysis you would like to see.
This software also isn’t just for single-family homes. The software can perform analysis on all sorts of rental real estate investments. You select anything from mobile home parks to shopping centers, and the program will automatically adjust.
Part of the analysis includes depreciation. That means after you select which type of investment you are analyzing, you will also need to input the percentage of the purchase price that’s for the land. Since land is not depreciated, the software need to know how much money to take out of the depreciation calculation.
Many of the commercial properties are valued differently than residential properties. The commercial properties generally are valued by their Cap Rate. Residential properties are more likely to be valued by their market price using comparable properties in the area.
The software allows you to pick either method.
In order to do the analysis, the software needs data. Just like any software program, the ‘garbage in, garbage out’ rule applies. Make sure you are gathering or estimating data as accurately as you can.
There are 4 types of data the software needs:
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Rental Income and Expenses
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Property Costs and Characteristics
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Financing
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Income Taxes
Another (optional) bit of information the software could use is your company information, the property address and your logo. Once you have done all your data analysis, the software can spit out beautiful reports with your analysis. The reports are very handy when discussing the idea with potential investors or banks for financing.
The analysis looks out many years in the future… consequently, it will need estimates from you on appreciation rates and percentage increases in rents and expenses. You can enter these as a ‘one-size-fits-all’ annual percentage, or you can be very detailed as to which rents and expenses are increasing and when.
Finance and Tax Calculations
Once you have input all the property data, the deal analysis software will ask for information about how you plan to finance it and what kind of tax rate you are paying.
From this information, the software can provide details about how much you will make after you service your debt. Besides conventional financing (30-year terms, fixed interest rate, etc.), it can give you an analysis of the weirder funding methods out there, including:
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Adjustable Rate Loans
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Interest Only
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Negative Amortization
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Refinancing
It can also perform calculations to give you an idea about how the investment will do based on your tax rate. Investors like to use specific tax shelters, such as 1031 exchanges and Self-Directed Traditional/Roth/401k accounts. The software will also give you information about how much you can save using these vehicles.
One area many investors are not aware of is the Unrelated Business Income Tax (UBIT). The UBIT is a hidden time bomb of extra tax in your IRA that could catch you if you meet certain criteria. The software will alert you to the potential of having to pay this tax.
Your investment may be so good that it is worth paying the tax, but you want to do your analysis just to make sure.
One other nice feature of the software is goal analysis.
Say you want to achieve a 25% return on your investment after 2 years. You plug this criteria into the goal analysis section, and the software will calculate what you should offer for the property to achieve that goal.
Of course this doesn’t mean the seller will accept your offer, but it lets you know what ballpark you need to be in.
All of the data can easily be put into a report to show your partners, potential buyers, investors or bankers.
The reports can also be divided into 4 sections, just like the data entry section:
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Rental Activity Analysis
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Property Resale Analysis – gives you a ‘what if’ scenario as if the property was sold at the end of each year
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Cumulative cash generated
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Financial measures (Cap rate, cash on cash return, etc.)
You can also print out a tax analysis and amortization schedule to accompany the reports.
All in all, this software gives you a lot of information and tools.
Price?
The Cash flow Analyzer without the IRA package is $99.95. With the IRA package, you’re looking at $129.95. Flipper short-term analysis is $99.95.
Buying both software packages together without IRA is $169.95, and $199.95 with the IRA package. All prices are one-time fees and are current as of the writing of this lesson.
Your Turn
Share your comments or questions below.
Do Your Due Diligence - Real estate ain’t cheap. Make sure you know what you’re getting into.
Consult Experts – Don’t try to do everything on your own. You end up making a lot more outsourcing work than trying to do everything yourself.
Practice Your Analysis – Before you start looking for deals, run through some scenarios. Don’t wait until you have your first deal to figure out how to analyze it.