My name is Carl Blaize Jr of Brooklyn and Bricks LLC Real Estate Solutions, and I wanted to touch base with the new investors on this blog regarding analyzing the numbers of a buy and hold real estate transaction.
Owning real estate can be an adventure, but to get the most out of any adventure that exists; one must have the proper tools to explore in order to advance to the next level. The first tool any real estate adventurer should have in there tool box-is an ability to assess the value of an investment property before purchase.
Running the numbers can give the investor an accurate financial forecast about a property; so let’s take a moment to read the Webster Dictionary technical definition of the word accuracy,” accuracy: the degree to which the result of a measurement, calculation, or specification conforms to the correct value or a standard.” Did you know that analysis of numbers can allow you to be a fortune teller? Yes! You now have an innate ability to predict the future by knowing how to truthfully work the numbers.
Analyzing numbers does not allow us to make sense of yesterday’s performance, for that will be the business of your tax man. Our job is to be that of a fortune teller that can predict the future of next year’s performance. Oh wait! Did I say analysis of numbers won’t allow us to make sense of past performance? Ok you got me! We’ll need the previous year financial data to give us a good idea regarding rents, and vacancy rates.
When analyzing deals, I like to do so based off of market data, as an example let’s look at the fictional property on 123 Broadway that collects $3,100/ month in rents. The numbers below reflect annual totals without a mortgage.
Operating income/year: $37,200
Vacancy at minus 8% : $2976
Common Electric,Gas: $650
Capital Expense at 8%: $2976
Property Management 10%: $3720
Operating Expenses Total: $15,522
Op Income: $37,200
– Op Expenses: $15,522
= Annual Profit $21,768
In the example of 123 Broadway, it will give an annual profit of almost $Twenty-two thousand dollars over twelve months which is a pretty good profit. We can then take our measurements and get even more data from the numbers. Let’s just say that the total project cost with purchase, closing, rehab, and hard money costs will be $100k. If we divide the projected annual profit by the total money that was spent for the procurement of 123 Broadway, it will leave us at a 21% cap rate which is very good. A good rule when analyzing investments with percentages is to use whole numbers only!
Annual profit: $21,768
÷ Total Project Cost:. $100,000
Cap Rate: 21%
Return on Investment(ROI) is another term that all investors should get familiar with. ROI measures the amount of return on an investment in regards to the capital used from out of pocket. The formula looks something like this.
ROI = (Net Profit / Cost of Investment out of pocket) x 100
Using the previous numbers from 123 Broadway; we can then easily come up with an accurate assessment of what the return on investment will be. The numbers reflect a property that had an out of pocket cost of thirty five percent($35k) of the total project cost($100k).
ROI = ($21,768/ $35,000) x 100
Ok! We have analyzed a sixty two percent return on investment from a capital contribution of $35k. I don’t know about you, but I know that this is a deal that I would be all over with kisses and hugs.
Just knowing how to analyze a deal can mean the difference between success and failure. I suggest that any new investor practice the analysis of deals daily, because by doing this exercise, the investor well be confident in knowing if the deal is worth pursuing. Always be accurate, and honest when putting in numbers, because the only person that will be hurt is you!