# How to analyze cash flow , making of a profitable deal

Is there a standard formula ,calculator or software
to analyze deals be it flip,rental foreclosure ?

Comps would help but I’m still trying to know when or what is a good deal
I’m confident the money and other parts will come
if I have good deal

Urban Investors,

Yes, there are general rules that most successful investors use. However, keep in mind that these are screening tools and that you need to look at all the facts associated with each deal. It is especially important to learn your market. You do that by looking at a BUNCH of properties in your target investment area (100 would be a good start). Here are the screening rules:

Flippers, wholesalers, and landlords generally will not pay more than 70% of the market value, less any repairs. So, multiply the market value by .7 and then subtract the repairs.

Landlords generally need the rent to be about 2% of the acquisition cost (purchase price + repairs) if the property is to have significant cash flow. So, to use this rule, divide the monthly gross rent by .02 to determine the maximum purchase price.

Good Luck,

Mike

Thanks I think I got the flipping equations for the most part

but the way the market is I 'm leaning to rentals
I have 2 units now

example 200,000 I need rents to be 4000 month in rent
is that correct ?

if so maybe I paid a little too much a year ago
but I do get a few hundred bucks a month positive flow

Thanks , looks a little confusing but think I can figure it out

You are correct, Urban Investor. The “Cash Flow Analysis” spread sheet is confusing. While you do need to look at many different aspects, one way to get a quick go/no-go answer is to analyze the numbers. Here is what I do:

Start with the Gross Rents on an annual basis. Subtract appropriate amounts for taxes, utilities, maintenance, insurance, management, vacancy, etc. as appropriate to the specific property. That gives you the Net-Net-Net return. Then multiply that by whatever percent return you require. I won’t touch anything for less than a 10% return and most of the time I get a much higher return. If 10% is the minimum you’d accept, multiply the Net-Net-Net number by 10 and that is the most you would be willing to pay for this property. Another way of saying this is that the in-pocket net spendable for this property will pay for itself in 10 years. If you decide to finance the purchase, the mortgage payment comes out of your in-pocket net spendable.

Less accurate but a much quicker analysis is to pick a “Gross” multiplier. As you get to know your specific area, you’ll be aware that most properties have a similiar operating cost factor. Let’s assume that in your area, there is an avereage 40% cost factor to cover all the items listed above such as taxes, insurance, etc. That leaves 60% as in-pocket net spendable. Simply multiply the gross annual rents by 6 (or 5 or 7) to get a quick idea of what the FMV of the property would be as justified by the rental income.

If this quick check looks promising, then you can refine the numbers. You also need to look at replacement costs. If it’s cheaper to buy a lot and build new rather than overpaying for an existing property, you move on even though the financial numbers look good.

Hope this brief explanation makes it a little easier to understand the valuation process.

Yes it’s becoming clearer now guess I need to run to the bank as soon as my numbers match up

Urban,

I thought it was pretty straightforward after reading the instructions on the Read Me First sheet. You only have to enter income and expenses for the first year of rental operation, the spreadsheet does all the calculations for you after that.

While you can use gross rent multiplier to ballpark a fair market value for a property, you don’t know whether the property has a net operating income high enough to adequately cash flow after your debt service.

If you enter all your income and expense numbers according to the instructions, then the spreadsheet will tell you whether your net operating income is large enough for the property to be self-supporting and also what your pre-tax and after-tax cash flow will be.

I also liked the Internal Rate of Return calculation. I think the IRR is more meaningful when you are comparing several different properties to determine which acquisition will give you the better return on your investment.

Urban:

I’ve recently begun seeking the exact same thing in my real estate investing – especially with the market the way it is, one can no long afford to “leave something out” in the purchase determination, only to find out about it later. I think a lot of us were lucky in the past 5-7 years to not have to worry about it. Before, it was a matter of just a little less in profits, but now, it could make or break the deal.

I really like the cash flow analysis spreadsheet. It’s true that it’s complicated, but that’s a good thing. The determination is complicated, so thus follows the analysis. I’ve recently been attempting to put together an equation of sorts for my company to use in making it’s “flip” property acquisitions. As we grow larger, I have less time to make the decisions all myself (and still maintain my legal practice), so I’ve been trying to put something in place that filters out all but the best deals. I posted the equation elsewhere on the forum:

http://www.reiclub.com/forums/index.php/topic,31623.0.html

Also, working in tandem with the cash flow analysis, our company utilizes an equation for acquiring rental properties, based on a return on investment benchmark. This equation is focused more on a holistic investing strategy (i.e. what return are you looking for out of your money) but I think it’s good to note while you’re scouting various income generating properties. Check it out here if you’re interested (in article format):

http://boozwatt.com/real_estate/How_to_Scout_Potential_Rental_Properties.html

Good Luck!

Mike

In response to your post regarding taking the rental income then divide by .02, that would be an incredible return, however I have not been able to find that anywhere.

If I am reading you correctly, your saying for an 85,000 house, you would need to be getting rents around 1700 a month in order for you to purchase it? 1,700 / .02 = 85,000 correct?

I have been looking and looking, if I could find a deal like that I would fall in love!

What areas do you find such cash flow? Certain states/areas? I am in Northern CA, there is NOTHING like that here. Closer to 1700 a month for a 500,000 house! lol

Scott

Scott,

`````` The problem with Northern California and other areas like it is that prices have widely deviated from their fundamentals (i.e. rental rate for a comparable house/apt).  That \$500,000 house should be worth more like \$85,000.  Even as a personal residence as you are taking on responsibilities, expenses, and risk.  Any amount above that is a premium that you are paying for the emotional value (to you) of owning the house or for playing the real estate appreciation pony.  R.E. investors and home owners in your area traditionally bet on appreciation/speculation so you end up with inflated prices.  Problem with appreciation is that you are speculation and in current times you are doing that with odds strongly stacked against you.  Wait a bit though (in your area) and actually cashflowing deals are likely to pop up as the bubble deflates.
``````

Scott,

I have no doubt that it’s harder to find deals in California than it is here in flyover country. However, I am wondering what exactly you have done to find great deals? Do you belong to your local REIA and have you made friends with the successful investors there (the ones that have a lot of rentals and are actively still buying)? Have you gotten out of the house and talked to people? Do you have wholesalers, birddogs, and realtors looking for you?

If you have truly exhausted all the methods of finding deals, then the answer is simple - don’t buy rentals! It is counterproductive to buy rental properties and then lose a boatload of money!

Where can you find properties that will meet the 2% rule and actually cash flow? FLYOVER COUNTRY. Get on a jet in California and start looking outside as you make your way to the east coast. If you ignore the first 30 minutes of the flight and the last 30 minutes, everything in between is FLYOVER COUNTRY, where there is still sanity.

Good Luck,

Mike

Thanks for the consise summary of that. I’ve looked at some properties now, but it seems really hard to find ones that meet the criteria. I’ve heard that one makes money when they buy the property, not sell it.

It seems that the real art here is finding the properties that are available so far below market value.