To analyze a property first you must realize that a majority
of the properties are not going to make cashflow, if they don't
cashflow you don't want them. This is just my opinion of course
but you don't want to have keep putting money into a property
every month, in the real estate world they call that an alligator.
Step 1: 7 X Rule
The 7X rule is a great rule of thumb that will guesstimate
whether a property will cashflow for you. The way it works is
that you take the gross rental income for the year subtract off
the yearly heat and lights (if paid by owner) and multiply that
number by 7. For example say you have the following property:
| List Price |
|
$199,000 |
| Rental Income |
$2,670 |
|
| Yearly Rent |
$32,040 |
|
| Heat |
$3481 |
|
| Electricity |
$0 |
|
| Rent-(Heat+Light) |
$28,559 |
|
| 7X (Rent- (H&L)) |
|
$199,913 |
This one is worth pursuing, but one of our ambitions would be
to get a lower price.
Step 2: Revenue Property Worksheet
See Prop_Revenue.xls for a worksheet
to decide if you can afford to buy the property. It will tell
you if you will have any rental income left after expenses and
the mortgages.
Revenue Property Worksheet
Name:
Address:
Address of Property:
Purchase Price:
Downpayment:
| Gross Annual Rent |
|
|
$32040 |
|
| Less Vacancy |
5% |
|
$1602 |
$30438 |
| Annual Expenses |
|
|
|
|
| Taxes |
|
$2910 |
|
|
| Insurance |
|
$1120 |
|
|
| Maintenance and Repairs |
4% |
$1281 |
|
|
| Heating/ Utilities |
|
$3481 |
|
|
| Water/Sewer |
|
$1312 |
|
|
| Management |
6% |
$1922 |
|
|
| Snow or Lawn |
|
$1200 |
|
|
| Advertising |
|
$600 |
|
|
| Payroll |
|
$0 |
|
|
| Pest Control |
|
$0 |
|
|
| Supplies |
|
$0 |
|
|
| Miscellaneous |
|
$0 |
|
|
| Total Annual Expenses |
|
|
$13827 |
|
| Annual Net Rental Revenue |
|
|
|
$16,611 |
| Less Annual Mortgage Cost |
|
|
|
11,019.30 |
| Annual Rental Income |
|
|
|
5,591.70 |
As you can see with 25% down this one cash flows quite handsomely.
Generally the 7X rule will tell you when a property will cash
flow even at 0 down.
Step 3: Two Offers
About this time you are left with a quandry. Do I
go with an all cash offer for a low price or do I go with a higher
price with vendor financing. Do Both!! See my link on making
an offer. The seller will take the one that interests them.
Real-Estate-Haven
