What’s going on everyone, my name is Brandon with BiggerPockets comm, author of the book on rental property, investing and the co-host of the BiggerPockets podcast, and today I want to show you my sort of by-hand strategy for analyzing, a rental property, using what I call the four Square method: now it’s nothing revolutionary. It’s just a way that I picture the analysis of a property, so I can decide if a rental property is worth buying or if I just want to ignore it, or maybe I want to find out what price makes a lot of sense.
This is kind of analysis that I do if I’m going to do an analysis by hand.. If you have any questions – and I jump into BiggerPockets comm, if you want to learn more about analyzing rental properties or buying rental properties or less, that BiggerPockets Icom – is the real estate investing social network marketplace and information hub, so we’re here for you every step of Your journey all right with that, let’s analyze a deal, I will say this as well.. It just helps YouTube know that you’re enjoying it so watch it. Let me know if you like it and if you like it thumbs up all right good all right. So I’m going to talk about the Foursquare method for analyzing, a rental property, the numbers on a rental property. So, to begin with, I’ve got four boxes that I’m going to talk about, and I’m going to talk about each one, this one then this one, then this one and then this one we’re going to start talking about income. Now, that’s usually the easiest for people to understand and sort of begin there. Someone go ahead and write this at the top income, all right. So once we’ve got this box labeled income, we want to figure out what goes in there. So, in this case, the most common rent or income you’re going to get is going to be rental income. I think most people know that that makes kind of sense, rental income now those other types of income as well. For example, there’s like, if you have a laundry machine you can have laundry income, you can have their storage, you might have a storage shed on the property. You might have something else. Other miscellaneous income, but generally speaking, rental income is going to be a primary source of income, and so what we’re going to do is we’re going to figure out how much that is now today we’re gonna analyze, a hypothetical property, and it is a duplex. So you can see the picture right here. This is the property we’re going to analyze together and this property is on the market, we’re gonna say for $200,000.
Now your area might be cheaper, more expensive for a duplex. Don’t worry about it! This works, no matter if you can buy a house for $3 in a pack of smokes or if you’re gonna pend spend a million dollars on a duplex. It doesn’t matter the numbers all work, the same way, so we’re gonna say $200,000. For this property just FYI and it is a duplex, so each unit we’re gonna save rents for $1,000 each so for those math geniuses out there $1000 times, 2 equals $2,000, so we’re gonna go ahead and type in here. You know what I may use another marker for the numbers. I think that’ll make things a little bit clearer, maybe so for the rental income we’ve got $2,000 per month. All right now don’t mind my terrible handwriting. I’m doing my best here today on the hand right. This is actually good for for me, so we’ve got our income or rental income. We don’t have on this property, we’re just going to assume. We don’t have any laundry, we don’t have any storage and roxeanne have any miscellaneous. So I’m going to go ahead and and say that our total income for this property. So I’m going to say, total monthly income is going to be equal to $2,000 per month and I’m going to let kind of box this off. So we know that this is a special little area right here. Now we’re done with section 1 we’re done with box number 1. Now we’re going to move on to box number 2, and that is the expenses for the property, meaning the monthly expenses. How much does it cost to own the property and here’s where a lot of investors, people trying to buy rental property mess up because they’re trying to buy property and they think it’s going to be a good deal? They don’t understand all the expenses, and so what I’m going to do is we’re going to list them all out here. So, first of all, let’s go ahead and label this expenses. If you’re wondering why this box is smaller than this box because there’s a lot more expenses than income, and so we want to have room for rent so we’re going to list on some of the most common ones. Now, if you’re brand new to this – and you don’t know what what these all are – you can figure them out talk to local investors, agents whatever or use this list. In fact, I’m going to and put together this entire document here for you in a downloadable spreadsheet that you can just download today try it out see what you think just go to BiggerPockets comm, slash analyze, rental property, that’s bigger pockets, comm! So I just analyzed rental property: you can download this entire for square, a PDF that you can then fill in on your own to analyze.
Your rental deals. So let’s go back to this which, but you can fill that in on paper. If you want later, but for now, let’s go ahead and just list them here, so we’ve got our taxes. We’ve also got insurance on a property now insure insure ends all right. Now, we’ve gotten out sometimes tax and insurance has incorporated in the mortgage. We’Ll talk about that a little bit the mortgage, but for now listicle taxes insurance, then we’ve got utilities, utilities and utilities is made up of a number of things. For example, it can be made up of electric electric committe up of water, sewer, garbage and maybe gas. Those are the most common utilities for a property. Now next, we’ve got after that. We’ve got things like HOA fees, home owners, association fees. If you happen to have any over there, you might have a lawn care lawn or snow and then you’re likely also going to have something known as a vacancy. They can see that means every month. We want to set aside a little bit of money knowing that at some point it’s going to go vacant and we’ll talk about how much to do that there in a second. So we got our vacancy. We’ve also got our repairs. We’ve got our what’s called capital expenditures which we abbreviate as capex capex is like saving up for big things. Like you know, every 20 years you need a new roof. So how much did you set aside every month for a new roof or for new water heaters? New appliances, new carpet: it’s those big items. We want to set aside a little money every month for that and then lastly, well almost last that we’ve got our property management gonna go ahead and write that here, property managed and then we’ve got very last – is our mortgage. If you don’t pay cash more gage, alright, so those are the most common you’re going to face. Now in your area, you might have a few other ones again. Talk to local investors see what kind of expenses they are facing, but these are the most common. In my area and in most investors areas so now we’re going to go through we’re just going to write down what the amount is for each one of these. So now each one of these can be figured out one at a time. So if you’re not sure what the taxes go to your tax assessor and find out what taxes are, if you’re not sure what insurance would be talk to an insurance broker, and so each one these can be figured out one at a time.
The more you do, this, the more general numbers you’ll get 10 to understand, so in this example of our $200,000 property. We’Re going to assume that taxes are going to run, let’s just say one hundred and fifty bucks a month. Now, maybe you live in an area where taxes are super cheap or maybe you live in an area where they’re expensive, don’t worry too much about it again. The numbers work, no matter how you do them, so we got $150 a month there now insurance again, that could differ a little bit, but I’m going to go ahead and just guess about a hundred dollars a month on this property now utilities. Sometimes the tenant pays them. Sometimes the landlord pays them. In this case, I want to say that this duplex, which is a you, know, a nicer duplex. It’s already been separated, so we’re gonna have the tenant pay their own electricity, their own water, sewer, garbage and gas they’re gonna pay all their own utilities. So for us, as a landlord, we’ve got a zero dollar charge there. Now this property, we’ll say, is not located in HOA area, so we’ll say: zero dollars there we’ll even say that the tenants going to make maintain their own lawn and their own snow removal. So we’re not too worried about that vacancy though we got to set some money aside for that every property I want to set aside money now, in my opinion, in my area, my company, we run about a 5 a little less than 5% vacancy, usually like Three or four two three four, but I like to go and has an estimate – maybe five percent, now five percent – of what we’re talking of the rental income. So for this case, if I took five percent of $2,000 we’re looking at about a hundred dollars a month now we’re going to set aside just for the fact that someday the property’s going to sit vacant. So next we’ve got repairs now. Repairs and capex are kind of linked together because they’re both about fixing the property up now, repairs are more like hey that you know the tenant, damn it put a hole in the wall or damaged the the carpet and little spot. I got to fix things right. Capex is replacing things so typically, what I like to do is I like to do you know. Maybe again it’ll depend on the quality, the property. How new it is, you know, is the roof already 20 years old, we’re going to replace that sooner. So, there’s a lot of factors to go into it, but typically I like to see around maybe $100 a month for repairs, maybe 50 to 100 per unit, and so in this property.
I’m going to go ahead and say: repairs are going to be a hundred bucks a month, and this is not an exact science. There’s no way to really know that is a 1. There there’s no way to really know, but we can kind of make an educated guess that about 100 hours a month between the two properties and capital expenditures on this property, I’m going to also go ahead and estimate about a hundred dollars a month so total each Month, we’re setting aside a couple hundred bucks a month for those big items and a lot of investors don’t do that, but I just think I think it is a smart thing to do, because those things do happen. I mean imagine you about a rental property and then 10 years down the road. Your cash flow in a couple hundred bucks a month, making some good money a couple years down the road. But you know you had to put a new roof on. There goes 10 years of income, you just 10 years of profit loss because you had to put a $20,000 roof on. You got to save up for those things, and so I make sure I set aside a little bit of money for that. Next, you’ve got a property management. Now you can manage yourself, but in this case I want to go ahead and assume that I’m going to manage. I have a property manager. Typically, my area property manager is about 10% of the rent, so we’ll say $200. A month and lastly, we have our mortgage now, that’s not a really a thing. You can just figure out in your head usually, but there are a million online mortgage calculators. In fact, BiggerPockets has one at BiggerPockets, com2us BiggerPockets comm, slash calc CA LC, but you can go anywhere, find a cheap. I mean an online free mortgage calculator they’re all over the place. So in this case, when I plugged in you know, we said earlier that the property was a $200,000 property. Now we got to make some assumptions here: I’m gonna put down some money for a down payment, etc. So, let’s just hypothetically, say we’re going to get a 160 thousand dollar mortgage. So if I do 160 thousand dollar mortgage at maybe 5% interest over a 30-year span, which is fairly typical in today’s, I guess interest rate economy we’re looking at about what is the eight hundred and sixty dollars a month for a mortgage payment. So at this point we’ve got a list of most of our expenses, if not all, of our expenses. Now we’re going to add all these up together. So we’ve got. You know: 869.
10. 60. 1160. 12. Sixty thirteen sixty fourteen sixty fifteen sixty 1610. Is that what you guys got, I hope so, okay, so at the bottom now we have our total monthly expenses and I really have a room for it. I’m going to put here total monthly expenses – pardon my awkward standing here not used to write on a whiteboard total monthly expenses of what do we say: 1610 I’ll put a little box around that we want to call it important, ooh, okay, so we’ve now got our Income, we’ve now got our expenses now, it’s time to move on to box number three for box number: three we’re looking primarily at cash flow, meaning how much extra money do I have every month now. This is usually pretty easy to calculate once you’ve got box one and box to finish so box. Three is going to be your cash flow and to know that all we want to do is income minus expenses, so our income on this property. We already know: let’s go back to our red marker. Our income was two thousand dollars per month. Our expenses was six one thousand six hundred and ten, and so to figure out our actual monthly cash flow. We’Re just going to take this minus this and we’re left with what’s at three hundred and ninety dollars, and that is our total monthly cash flow. Now I’m going to put a little box around that because it’s an important number so we’ve now got income expenses cash flow, but the question is: is three hundred and ninety dollars a good amount of cash flow? You can’t answer that question. It’s kind of like asking you know is, I don’t know peanut butter, the best color I don’t know it doesn’t really make sense, because we don’t know anything about that number. We don’t know. What’s around it, we don’t know how much money I mean. Did you put a billion dollars in just to make three hundred ninety bucks, or did you put two dollars down to make three hundred ninety dollars? So we have to compare it to how much money we put into it, and that is called your cash on cash return on investment. Big word, cash on cash return is how we’re going to summarize it, and that is a box for is for here. So we’re going to write cash on cash, our oh, I return on investment. Now don’t get complicated or don’t get confused by the kind of complicated jargon here. All it means is, is your money earning what kind of percentage is it earning? If you were stick a thousand dollars in the bank and then they paid you a hundred dollars this year, that would be a ten percent cash on cash return.
It’s like what kind of return on your cash flow. Are you getting so we’re going to head and figure that out now now that’s a pretty easy thing to figure out, but we have to first determine how much money we put into a deal. That’s the first thing we do when we want to look at return mo know how much money we put into it so to do that, we’re going to add up all the money we put into this, so we’re going to start with our down payment and what Else would we have to pay when we buy a property with maybe do closing costs, so closing costs what else maybe repair money or rehab budget budget. So we had a down payment, closing Castle, got of repairs and maybe just miscellaneous head miscellaneous other. Who knows? Maybe you in the process – I don’t know – maybe you want to who knows whatever appraisals whatever, but that’s kind of part of closing cost, but either way when you buy property, there’s a lot of areas you might spend money on to get it so we’re going to Add all those up together in to get our total total investment all right, so our down payment in this case earlier, we talked about the property, was listed at Andrew Bott it for $200,000. So if we bought it for 200,000 – and we put eight we’ll say – 20% down payment, twenty percent of two hundred thousand is 40,000, so a down payment may switch to the red marker $40,000 for down payment. Now we also had clothing cost to buy the property when we bought it. We had to pay the realtor are not the real, the the title company or the attorney way to pay for an appraisal way to pay for loan documents and loan fees, and all that so we’ll say, closing costs in this case was $3,000. Now, maybe it’s more, maybe less in your area depending on your loan in your area, but we’ll say $3,000. I mean, let’s just for simplicity when we bought the property, maybe we wanted to repaint the outside. Maybe we wanted to make it look a little nicer. So we’re going to say how about $7,000 for our rehab. So again, I think that’s usually painting the property or doing whatever. So in this case, our hypothetical property. Here we spent 40,000 a downpayment 30,000 closing costs 7,000 rehab, and I’m going to leave this one blank will say $0 and miscellaneous other, but adding them all up. Our total investment was at this point $50,000, so we’ve invested $50,000. So and here’s where we’re going to figure out our total cash on cash ROI to figure that out, we want to take our annual cash flow, which we already well.
We know our monthly cash flow, so we’re just going to take our monthly cash flow of three hundred. Ninety multiply that by 12 and we’re going to get. I did that calculation earlier four thousand six hundred and eighty four thousand six hundred and eighty dollars, so we’ve got four thousand six hundred eighty dollars in annual cash flow and now we’re going to divide that so to figure out your cash on cash return, we’re simply Going to take our annual annual cash flow and we’re going to divide it by our total investment, so annual cash flow we already know was four thousand three four thousand oops six hundred and eighty dollars divide that by our total investment, which we already figured out right Here of fifty thousand, and what are we left with in this case? Four thousand six hundred eighty divided by fifty thousand trusty calculator works out to a nine point: three six percent. It actually comes out at point zero, nine, three six, but we want to make it a percentage, so you just multiply by 100 and the % so we’re left with a nine point. Three six. So our cash-on-cash ROI is equal to nine point three six percent, so that is how we analyze a deal using the for square method. We got four boxes, one, two: three and four: to figure out: our income expenses, our cash flow and our cash on cash. Roi. Now the question becomes and I’ll be there wondering is a nine point. Three six percent cash on cash return good now this is when it gets a little bit tricky and we could talk for hours on this, but this is really going to depend on your goals. Your strategy, what you’re trying to do and what other investments you can have. For example, let’s say you can stick your money in the stock market today and know that you can make twenty percent now that’s doubtful. But let’s just say you could do that right. Then nine doesn’t sound very good but let’s say you’re earning two percent on your stocks over the past ten years. Well then, maybe this is a fantastic return. In fact, over the last like hundred years, the stock markets been like six seven percent average. So this actually does a little better than that. So if I was comparing between this and putting it into the you know sp500, I might choose this over that now. Another thing we did not talk about today. We can’t really do it with this method and gets a lot more complicated to do by hand, and that is your overall return or even more complicated your internal rate of return.
What those numbers do is they go a lot deeper into well? Are you building equity, for example? Let’s just say that this property we bought everything worked out. Fine, we got the numbers. We came up with a nine point: three six percent cash on cash return. What if that property wasn’t worth $200,000? What if we got an amazing deal and in reality all the other duplexes in the area, we’re selling for a million dollars? I mean, let’s be crazy, a million dollars, so we can turn around tomorrow and sell this property for a million bucks. Well now this deal looks a whole lot better right, because, although our cash on cash return meaning the return on investment from our cash flow, although that is nine point three six percent we’ve got a ton of equity that we can sell the property and make a Ton almost like we’re flipping it right, and so cash on cash is just one aspect to look at if you have a property with a ton equity. That can be another thing, and for that I like to look at your total return. So, let’s say after five years: if the property went up in value three percent per year and we sold it, we paid realtor fees. How much would we get? How does that turn out to an overall return? That is a number that I care a lot about and that’s something that we’re not going to be able to do by hand very easily. You might spend a half-hour 45 minutes to an hour figuring all that out, and so what I recommend instead is, if you guys, are interested in learning more about analyzing deals, jump into bigger pockets, dot-com forward, slash analysis, bigger pockets, comm forward, slash analysis. What that site is, is it’s the home of a bigger pockets, rental property calculator house, something calculator, a bir calculator, which is a kind of cool thing. You can go look up and then the whole sound calculator and what these calculators do Is they let you to basically do this process, but they do it in a much more organized manner at just four simple pages, almost like you know page for your details, you got a page for income and expenses you’re, basically entering all this number in, but then It’s also going to ask you a few questions like what do you think the future is going to look like what kind of returns do want to look in the few or what kind of appreciation do we expect in the future? What do we think the property is worth today and then you can add the final results of that you can see like this PDF document.
That shows you what’s going to look like next year, the year after the year after you get some really good estimates for the future, including total returns So I’d highly recommend digging into those calculators You can get to my BiggerPockets com forward, slash analysis So the last thing I’ll say about analyzing properties Every single week, every single week now on BiggerPockets, I host a live webinar, a live class kind of like this If I’m using a computer and sitting down and being lazy – and I teach different aspect of real estate some time – I’m talking about buying duplexes – sometimes I’m talking about flipping houses – sometimes I’m talking about analyzing deals, finding deals all that kind of stuff, and so I do This every single week, they’re completely free to attend, live, and so I want to encourage you guys to show up sign up BiggerPockets, calm, such webinar and the reason I invite you That is because every single week we analyze a deal together, because I think this analysis process is so important So every week we dig into a property life property, a very specific one We find it on the MLS together or on the market We find it and we look at it We analyze it We figure out where it’s worth buying, where it’s not worth buying, and we have a lot of fun doing that So again, you can sign up for that Biggerpockets comm, slash webinar and I hope to see you at one of our bigger pockets webinars So I think that’s a that’s about it for now, if you guys have any questions, like I said, jump into the comment section of this page, ask your questions and if you know the answer, please jump in and answer questions as well I can’t get to all of them so be sure to kind of interact in people and, like I said, check out BiggerPockets comm, slash analysis to dig into the property analysis tools on BiggerPockets comm So hopefully, you guys have a good indication or understanding now how to analyze for cash flow and cash on cash return, how to do the numbers on a rental property I will see you around the BiggerPockets community, I’ll see you on the bigger pockets podcast or on bigger pockets, webinars or maybe just hanging out in the forums for bigger pockets calm My name is Brandon signing off