The 5 Formulas You Need to Analyze Any Real Estate Investment
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- เผยแพร่เมื่อ 26 มิ.ย. 2024
- Real estate investments come in all shapes and sizes. You got flips, rental properties, commercial real estate, BRRRR (buy rehab rent refinance repeat) deals, and a dozen others. Thankfully you don’t need twenty different calculations to figure out whether any of these are good real estate deals-you only need five. These five real estate formulas are stupidly simple, don’t require a calculator (most of the time), and can be done with almost any real estate deal you come across.
If you’re trying to make a serious profit or passive income with real estate, then real estate math is about to become your best friend. Today, Tarl Yarber gives you a step-by-step guide on calculating these numbers, when to use each of them, and where novice investors usually go wrong. Calculating your real estate numbers is one of the most important steps in buying real estate, so feel free to rewind and replay as much as you’d like.
Don’t like manually calculating out numbers? We’ve got you covered. Click the link below to use any of the BiggerPockets real estate investing calculators for your next deal!
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Use the BiggerPockets Real Estate Calculators on Your Next Property:
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Check out Last Week’s Episode on Tarl’s Biggest Flipping Mistakes:
• 3 House Flipping Mista...
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What Are Cap Rates and How Are They Calculated?
• What Are Cap Rates and...
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How to Calculate Cash-on-Cash Return:
www.biggerpockets.com/blog/ca...
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Rental Property Numbers So Easy You Can Calculate Them on a Napkin:
www.biggerpockets.com/blog/re...
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Connect with Tarl on BiggerPockets:
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@tarlyarber or / tarlyarber
00:00 5 Real Estate Formulas Every Investor Should Know
01:10 1. Cash on Cash Return
09:05 Where Most Investors Get CoC Wrong
14:15 2. Net Operating Income (NOI)
18:09 3. Capitalization Rate (Cap Rate)
24:20 4. DSCR (Debt Service Coverage Ratio)
30:05 5. Max Purchase Price (MPP)
33:21 Run the Numbers BEFORE You Buy!
#biggerpockets #tarlyarber
This is the bomb. I sure appreciate these financial types of videos and not just the fluff stories. This is how you really win with real estate.
Extremely insightful. Appreciate this video. Ty!
Love these math episodes.
We LOVE VIDEOS LIKE THESE.. keep it up please
great educational video!
Good video my friend
Had a listing agent give me his calculated Cap Rate of 6.2% on a property last week. Ran my own numbers and got about 4.2%. The agent said since they didn't have to do any major maintenance in the last two years, they put $0 in for long term maintenance in his calcs. So many agents are clueless.
What long term maintenance would be an operating expense? It sounds like you calculated NOI incorrectly.
@@Walina1001 Not calculating NOI, I was calculating Cap Rate. Cap Rate includes all costs including estimating annual expenses for larger maintenance such as water heaters, a/c units etc. The agent also said there had been no vacancy for two years, so they assumed 0% vacancy.
Capex are not operating expenses. They are not part of the NOI. Also why are you trying to calculate a cap rate? And are you using asking price?
@@Walina1001 Water heaters, a/c unit repairs, sprinkler system repairs etc. are not capex, just expenses. They are part of a Cap Rate calculation, either as a percentage of the cost of the property or a percentage of rental income. The agent also assumed no vacancy in his calculation. For Cap Rate, I use the price of the property plus any closing costs as if we were paying cash for the property. For CoC calculation we include all financing costs.
You should learn the correct definition of capex.
Killer video!
Great video
Tha k you for explaining that the actual cap rate is often (and confusingly) used interchangeably with the market cap without any acknowledgement of the difference. It took a while for me to figure this out. I hope your clear explanation helps prevent confusion for new investors.
Love the explanations however can anyone explain what numbers to use for a BRRRR regarding Project C on C? Just use year 1 or analyze additional years as rents raise, Property Management is at least 10% less (assuming low turnover), and Cap Ex comes into play.
Thanks for the tutelage I greatly appreciate this!!! Go BiggerPockets Go!!
if 3% Actual return is bad, what is a good target to aim for?
net income is the same as cash flow right?
I don’t think that you should call it a cash-on-cash project return. It really should just be called a project return. Cash means out of pocket-your down payment.
Cap rates are not a rate of return. Cap rates measure VALUE of NOI. In a 10 cap market $1 of possible NOI has sold for $10. In a 5 cap market that same dollar of NOI has sold for $20!! I challenge you to show me which property has a higher return.
A cap rate is not a measure of return. Cap rates come from an income approach to value called direct capitalization. All your 10 cap means is that investors have paid $10 for each possible dollar of NOI. in the 4 cap market they paid $25! You are explaining this incorrectly.
Also, SFR's are not valued by cap rates.
And, capex is not an operating expense.
You should check the Chad and Brian Burke recent youtube interview that correctly explains this.
His explanation is pretty much in line with what I've heard before. Cap rate can tell you your rate of return on your property (what he calls "actual") or it can tell you the risk vs potential reward in a particular market.
SFRs CAN be valued by cap rate, but LIKE HE SAID... investors don't usually do that.
Cap ex could be an operating expense depending on how you handle it.
Again, he seems to have a pretty solid understanding of these concepts. If you didn't get any value from this video... you should follow your own advice and watch that other video.
Where is the "return"? As I stated the cap rate MEASURES to the penny what the investor paid for NOI. It does not measure returns or risk. He is scamming you.
And where the hell are you getting reliable cap rate comps to value SFR'S and why aren't you using the more accurate sales comps method? It makes you seem like you are pretending to know more than you do.
@@Walina1001 Lol! If he is scamming me, then 1) so is everyone else who's making videos with the same info, and 2) it's a fruitless "scam" to trick someone into a false understanding of cap rate. I mean, what does he have to gain from that?
There are no market cap rates for SFR, which is one reason I DO use comps. However, like he said, you CAN calculate the cap rate on how a SFR is performing... it's just NOI/property value (or purchase price)... which is just another metric you can look at. It makes it seem like you really don't know much about this. Are you even familiar with Tarl Yarber... or Bigger Pockets? You're kinda embarrassing yourself.
OK. Let's eliminate your input quickly. Show us how to value a SFR with cap rates.
1. Yes, all those people stating incorrect information are trying to scam you. It is a billion dollar plus SCAM
2. if the scammers buy crap at a 15% cap rate and sell to you at a 10% cap rate because they have tricked you into believing 10% is a rate of return then you have been scammed! Pretty simple but it relies on the constant false narrative of cap rates being a return.
What is a good % for each of the formulas? For example, what’s considered a strong actual CoC return %?
It depends on your goals and market. There is no correct answer. For those seeking cash returns the higher the better. For others with a long-time horizon and a focus on appreciation they can tolerate lower numbers. Some will say that 10 to 15% CoC is their target, but on the west coast 4% is likely the best you can do.
@@timtaylor9339 Hi Tim, thank you for this. I live in CT and I’m about 40 minutes outside of Manhattan. We’re not getting anywhere near 10-15% CoC. We’re in that 4-6% range; 8% if we’re lucky.
@@edgarg6559 I am just retiring, and my criteria is a minimum of 5% CoC with 25% down on property. I figure if I can make 5% cash that I can use to live on and then loan paydown, tax reduction from deprecation, and appreciation of the property; I should be about 12% or more overall return. At this point in my life having cash flow is important to me. Other that are younger may be willing to take a lower CoC.
@@timtaylor9339 that’s not a bad approach. If you compare your 5% CoC to other investment options…the 5% is not bad.
Real Estate is local. I’m a commercial realtor in Florida. We have $200M+ worth of investors who want Midwest returns in Florida. We always have to give them a reality check. Some get it, some don’t. Everything is high in Florida. Know ur audience and know ur market. And please know how to do a Pro Forma. 😂
Good info. Question... I'm usually looking for around 12% "actual" CoC return... what's a good number to aim for with "project" CoC return?
If you don’t mind me asking, where are you located? I’m in CT and struggling to find deals with CoC anywhere near 12%. It’s usually around 6-8% with home prices being so high.
@@edgarg6559 Chicago area.
I’m 2mins in does this work on multi family’s?
Yes
How’d you get 300K from 250k + 50K in the example around the 11:00 min mark. For the project CoC. What am I missing ?
Nothing, I totally messed up when i recorded the video and didnt do my math wrong. My fault on that, i caught it later after we posted...but the fundamentals are still true with that section
@@tarlyarber okay got it thanks
Going to make the same comment. Looks like you aware of it tho…great video!👍🏽
10:12 200k +50k = 250K not 300k. Did I miss something?
so is this basically just levered vs. unlevered CoC????
This is a fantastic tutorial. Thank You for your generosity in sharing your wealth of knowledge and experience.
where can i find the shirt he has got on in this video?? lol
I did not really understand cap rate
how do u buy for 200k put in 50 k but you saying 300k?
After this video I on another level, thanks teacher from Moscow😊
Great topic but very hard to follow. The scribbles on the paper don't watch up with what you're talking about. You're talking faster than what is being illustrated. I'm spending more time trying to figure out how what is written down is matching up with what you're talking about
I like that his handwriting looks like a ten year old scribbled it.
Even YOU can succeed.
Love the content. Kinda wish you practiced you writing skills. Your mouth moves a lot faster than you notecards...sorry man it's a trainwreck.