In this video, we’re gonna talk about how
you can calculate numbers all rental properties the effective way and the
proper way hey what’s going on guys it’s Sam Kwak
one of the Kwak Brothers and today we’re back to share how we like to calculate numbers
on rental properties whether we’re doing multifamily or single-family there are
some differences but I’m gonna give you guys examples of both on how you can
start calculating numbers on rental properties so one of the first things
that we want to do on rentals is get an idea of what the market rent is now
market rent is the average rent that is being charged in that given area now
this may change per block by block this may change by neighborhoods this may
change just because the school is right next to the apartment or the house so
it’s really important that you understand how to properly calculate the
market rent right the the rental comps as far as what you can charge for rent
now I met people where they’re in an area where the average rent for a
three-bedroom two-bath is $1,200 but there they were charging $1600 so it
wasn’t a mystery as to why they couldn’t rent it for 3 months until they finally
had to come down to 1,200 to be able to rent it out to a tenant so you might be
asking where do I get the market rent right how do we determine what the
market rent is so one of the first sites that I can introduce you it’s called
rent o meter calm and I’ll write it down rent o meter so rental meter calm now
I’m not getting paid to tell you guys this I use this tool myself to get an
idea of what the average market rent is going to be now a more effective way is
having a property manager or a lease agent give you what’s called a rental
comps and it’s similar to the comps that you would get when you’re doing a fixed
and flip or getting an assessment of what the property value is so doing a
rental comp is basically compare a like property right property that look that
looks and has the similar features of the property that you’re analyzing to
see what they’ve rented for in your given
so with the rental meter coming at least gives you more of a quick and dirty
number as far as what the market rent is going to be now let’s say you went
through the process of figuring out what the market rental market rent is we’re
gonna go ahead and say for this example I’m gonna straight a scenario this is a
single-family house it’s a 3-bedroom 2bath house that can be rented for
$1,200 okay there we go so with that $1,200 a month that’s a three-bedroom
two-bath rent rent and again we are absolutely sure that this property can
be rented for $1,200 because we know that similar three-bedroom two-bath in
the area have been rented for $1,200 right and a lot of times there’s a lot
of newbie mistakes a lot of amateur mistakes that are done where people
think well I think I might be able to slide by with having $25.00 more when
everyone else is charging 1200 right well you either have to justify that
extra $25 of rental charge or you’re gonna have to come down to what
everyone’s renting because if you try to you know take one for the team and try
to bring up the the rent it’s not gonna work really well we’re gonna have to
wait a little more and you’re not gonna get a lot of applicants wanting to apply
for your rental so you want to make sure that you’re within the average right you
don’t want to try to reinvent the wheel so with that $1,200 one of the first
things that I look at is what does it cost to maintain the property now this
all this all comes to a question how old is the property when was the last time
there was any major renovation to the property what type of area right what
are the demographics like how do the tenants treat the properties in that
area so that matters a lot because we have to determine what the ongoing
maintenance cost is going to be typically I like to say 10% for
maintenance but if you’re in an area where it needs a lot of maintenance or
the property has some major issues where you have to constantly repair it then
you may have to bump the maintenance up to 15% to be able to kind of forecast
some of those issues that they’re gonna so generally we just gonna call call it
at 10% and in 10% of 1200 obviously is gonna be $120 okay that’s maintenance that’s right and
this is what we like to call gross rent not because it’s nasty or gross this
that’s the accounting financial term for it so we serve the gross rent $1200 –
$120 for the maintenance and that’s to make sure to cover for any breaking
toilets faucets or whatever right now you may say well my property is perfect
there’s no problem there’s no repairs well you still have to make sure that
you put some of the reserves so in case let’s say in an air conditioning goes
down you you got the money to cover it right you don’t want to have to come out
of pocket or take into your credit card to be able to do that you want to build
in the reserve to make sure that there isn’t it’s any sort of large item costs
that you’re you’re faced with the next thing that I that I cover is the
management now here’s the argument for this and and this is where I argue with
a lot of people with management because people tell me well Sam I manage my own
property therefore I don’t have to put the 10% in or 8% whatever the management
cost is going to be in your area but my argument is well if you have to manage
the property yourself don’t you still have to spend that time right where you
could have spent that time at work you could have spent that time to go look
for other deals you could have gone spent that time spending with your
family right because that’s why we bought rental properties is we want to
have that freedom to be able to spend that time with our family but if you’re
spending all that time on managing shouldn’t you at least be compensated
for it right so either way you’re paying for management whether you’re doing it
with time or you’re doing it with monitor with money and paying other
managers to do it so my argument is always put management costs in there
because you want to make sure that you’re compensating for your own time or
compensating for someone else’s time to manage your property so typically I
would factor in 10% for management as well okay I’m not gonna spell well today
apparently so bear with me here guys manage there you go and we’re gonna say
that’s $120 a month okay another thing is that we want to pay it faster in
something called vacancy now vacancy is another forecasting expense where we’re
gonna anticipate that out of an entire ear we can expect that one month will be
vacant now you may have tenants that stay in your property for multiple
multiple multiple years in that case I would still sign it aside because let’s
say a tenant lives in your property for seven or eight years which is fairly a
long time and within those seven or seven or eight years you may not have
the opportunity to go in there and do some major renovation or remodel
remodeling or the carpet may have to be replaced and so on now on top of the
maintenance cost we need to do some major capital improvements renovation to
improve the property so there’s dual purpose to this vacancy vacancy covers
not only the the cost of the property being vacant while you’re advertising it
but in another sense I want to make sure that my vacancy reserve is being built
up even if the tenant doesn’t leave one month out of the year so I’m gonna
factor in 8% for vacancy that is the industry average I’m not just making
this up right you can go less you can go more if
you’re in an area where there’s a lot of frequent or no turnover then you may
want to calculate 10% for vacancy if you’re in an area where people want to
stay they’re not leaving even then I’ll probably still you stick with 8% but
I’ve seen people go all the way down to five but I’m gonna stick with 8 just
because I prefer to be conservative with my numbers so with 8% let me see what
the the math is I want to be exact want to be accurate so 1200 times zero 8 is
96 dollars a month there we go and that’s what we call vacancy and
after maintenance management vacancy we also want to factor in taxes and
insurance taxes being property taxes okay and
insurance now property taxes and insurance I don’t really have a fixed
number for this this is why this is why I’m running this number makes a little
bit more difficult so your property taxes you can usually find out through
your county tax assessor slash tax treasurer office so those are those
information is our public they’re free they’re easy to access you just search
the county’s name and put the tax Treasury slash tax assessor and google
it and you should be able to find a website whereby all you have to do is
enter in the address and you should be able to find that information about the
property tax on a given property that’s also applied to multifamily so we’re
looking at single family but also apply some multifamily now with the insurance
that’s another big question mark because usually insurance rates adjust depending
on the location is there a fire alarm what is the overall condition of the
building so there’s a lot of factors that go into insurance underwriting and
I’m not an insurance agent to tell you this but the best way to and quick and
dirty way if you have some time is to call your preferred insurance agent and
just have them give you a quick you know estimate and of course you want to be
considerate of the insurance agents time please don’t do that when you’re
practicing because you don’t want to be bugging your insurance agents when they
have other things to do but ballpark if we’re dealing with single-family
3-bedroom 2bath 1200 square feet I would elect and say you’re gonna be
paying about 70 to 80 dollars a month so let me just do the math here nine
hundred divided by 12 yeah about seventy five dollars a month for insurance and
I’m gonna go ahead and say I’m gonna go use the Illinois average I live in
Illinois where our property taxes are up there was you so if this works for
Illinois I’m sure it’s gonna work for you but Illinois let’s say the property
tax is averaging I’m gonna say Thole 500 – or / 1225 hundred divided by
12 that gives me about 208 dollars a month in property taxes which seems that
you know reasonable I’m not I don’t think I’m far too stretched so let’s go
ahead and subtract all that number so we’re gonna start at gross rent 1200 and
if you guys got a calculator with me you guys can follow follow with me here
so $1,200 – 120 – another 120 for management $96 for vacancy and subtracts
$75 for insurance and 208 for the taxes so what we get is a net and I’ll write
that further down here so that you guys aren’t well I think you guys just should
still be able to see that so 585 581 excuse me is your net operating income
so this is a number after you have subtracted all your expenses now
typically I would prefer that my numbers to my net operating income to be
anywhere between 45 to 50 percent of the gross rent so it looks like we hit the
spot here to mystify yeah so we’re at 48 percent expense – well that would be net
income ratio so I’m gonna go and do the opposite 581 – 1200 give us or 1200 –
581 she gave us 619 divided by 1200 so we have an expense to income ratio 51
percent so this number I would actually be comfortable with if it if it went
down any more – like say five hundred I would start to get a little worried and
I will figure out where in my item here have I gotten too expensive and usually
the number one victim the number one suspect is the property taxes using the
property taxes are really high whereas everywhere everything else should be
okay now with the 581 I’m comfortable with that I like that number it fits in
my forty five to fifty five percent ratio that I’m looking for
so with that 581 if you’re using leverage meaning if you are if you are
using financing whether it’s a mortgage or home equity line of credit
whatever financing that use you know of course my brother and I love using the
owner financing you have to also now subtract this number 581 to whatever the
debt service says debt service is the the proper term right – to describe the
mortgage payment so technically your mortgage is not an expense
Wow the interest you can claim it as an expense on your tax returns and and your
official financial statement but in looking at an analysis of a rental
property you’re gonna see the mortgage payment or some sort of debt payment as
what we like to call debt service so 581 subtracting your debt service okay –
whatever that service is so we’re gonna take a step back and we’re gonna go
ahead and just give this property a value of saying hundred thousand dollars
so with a hundred thousand dollar purchase price let’s say and that’s what
this this property’s worth okay we’re gonna advertise this baby at 25 years
let’s so I’m going to pull out an amortization calculator and an
amortization calculator should give you an idea what your monthly payment is
going to be assuming that you’re you’re buying this property for $100,000 if you
put 20% down using a traditional mortgage so I’m gonna go and by the way
I know you guys aren’t seeing my screen I’m just pulling up a regular
amortization calculator so I’m gonna go ahead and say this is a home purchase
100,000 well the loan amount will be 80,000 because we’re doing 20% down and
we’re gonna say this is dirty your amortization at five and a half percent
right and we’re looking at a monthly payment so this is 20% down at five and
a half percent interest for for 30 years you’re looking at four fifty four as far
as your debt service and this is your noi your net cash flow
your cash flow is going to be and I’ll do the numbers for you guys five eighty
one minus four fifty four is going to be one hundred and twenty seven dollars a
month okay and that’s cash flow that’s what we’re
after right the cash flow is what put puts food on our table right clothes in
the kits back the roof over ahead it makes sure that we have gas in our car
that’s what the number that’s the number that we’re going after so in any
mechanics if you’re trying to make this into a great deal
there are several control points that you’re seeing here right so the control
point a is what is the gross rent and how are we starting with that the second
control point is what are the property taxes because property taxes can can go
up can go down usually they go up in my state Illinois so you would imagine this
is going to continue to go up so one thing that people don’t quite understand
is if you rate if you do raise property taxes to pay to pay for some sort of
state expenditure it will raise that because investors are looking to get
this and ultimately gain to that so control point a control point B control
point C is what you are buying for obviously you can’t be buying a $250,000
house right doing the same terms and expecting that you’re gonna cash flow
because you’re gonna go negative so it’s very important to understand those types
of control points where your knowledge is gonna come to to the play and come to
the table is your ghost rent your property taxes how to how to get that
information as well as understanding the maintenance aspect because if you buy a
dirt cheap property typically and this is speaking speaking in general if you
spy a dirt cheap property that needs a lot of work this number is gonna be way
higher than what I’m anticipating second thing third thing is that making sure
your purchase price is sound and reasonable that you know you’re doing
the right comps you got the right after repair value and that the term of the
financing right is at a reasonable rate to where you have a fair debt service
now be careful another thing I will mention or use
purple for this one be careful with the interest rate on financing because a lot
of time if you get a rental property if you are trying to put financing on
rental property the bank would try to offer you an adjustable rate and if you
guys understand what’s going on in the current economics is that the rates are
going up meaning if this turns into six and a
half percent okay let me see what that math looks like if the rates go up as as
we’re seeing that if that goes to six percent our cash flow is gonna go down
or six and a half percent I should say so if the if the interest rate goes up
by another one percent you’re at six and a half percent the debt service is gonna
go up because you’re gonna have to pay a higher rent so the debt service is that
is 506 I just it’s math here if we do that math of 581 minus 506 you’re
looking at only of seventy five dollars of cash flow right which actually fills
the tank on my car so so guys understanding those control points
things that you can you can control and you cannot control will give you an idea
of how to properly calculate the cash flow and the numbers of a rental
property that also would give you an idea where to invest because you don’t
want to necessarily invest at the most expensive areas you want to invest in
areas where the purchase price as well as the gross rent as was the property
tax they all work in harmonious way where it’s going to cash flow and at the
same time pay attention to the financing because that’s what’s gonna altom utley
control and kill or get you the cash flow that you want to have the lifestyle
that you want to create so guys that’s how I like to calculate numbers on
single family on a multi-family it’s generally the same what will be
different is that you’re gonna have additional expenses such as utilities
because if you let’s say have a 24 your 24 unit whole property there’s going to
be a electricity that you get you have to pay for common areas so common areas
are like the hallways right the laundry the outside parking lot lights right you
have to pay for that as a multifamily landlord so you’re gonna have to put
those utility costs gas electricity water in some areas factored in so the
numbers will work on multifamily because you have what’s called the economy of
scale we have lots of units and lots of cash flow to cover and absorb some of
those costs so with multi-family single-family
you’re going to see similarities with multifamily you’re going to see more
expenses or line items of expenses due to Atilla T’s you’re gonna have a larger
land landscaping bill because you’re going to cut you know cut the grass
you’re gonna have snowplow bill if you live in areas that have a lot of snow
like here in Chicago so anticipate that in multifamily so guys that’s pretty
much it from me with analyzing numbers if you have any questions go ahead and
leave them down below in the comment section below we’re pretty good about to
answer any questions when it comes through our youtube channel so don’t be
afraid I won’t behind I’ll go ahead and answer your questions but we do reserve
the right not to answer any questions if it’s anything that has to do with
harassing or foul language or you know it’s inappropriate then yeah we will
ignore that but guys if you have any questions go ahead and ask below and
we’ll be able to help and stick around guys because we’re gonna come up with
more videos like this and glad I can help you guys so see you guys in the
next video and go and make some money well hello there you made it to the end
of this video congratulations and that probably means that you liked our video
and you loved what we did so be sure if you want to get more information more
YouTube videos from us about real estate investing be sure to subscribe to our
youtube channel and hit the bio icon to make sure that you get notifications on
our future videos about real estate investing