You think you’re interested in investing in real estate, but it’s a big purchase and you do not want to lose a bunch of money in the process. How do you know that you’ll make money in the deal, and how do you know how much you will make? At first this may seem overwhelming but I assure you the math is easier than high school algebra. Today we’ll talk about purchasing a single-family residence as an investment.
The most important thing when investing in real estate is purchase price. As the saying goes, “You make all of your money at the purchase.” Two ways to get a great purchase price is to buy real estate in a depressed market or to buy a distressed property. A distressed market is a great time to buy real estate. The most recent example is after the housing crash in 2010. Everything is on sale and it’s easy to make money. The only problem is it only comes around occasionally. A distressed property is one that has not been kept up. You can often get these at hugely discounted prices. A great place to start looking for distressed properties is auction.com. The major drawback of auction.com is you do not get to see the inside of the house before you buy it, so a good assumption is that you are going to have to do a lot of work to get it up to par. In my opinion unless you already have a bunch of money or you only want to invest in depressed markets, the ability to fix up properties is vital to the real estate investment process.
When looking at an investment property, the first thing I do is look at the 1% rule. The monthly rents should be around 1% of the purchase price. The best place to find out how much a property will rent for is a good realtor and/or property manager. But just to get a ballpark number to see if the investment is worth pursuing further, zillow.com will get you started. This means that if an investment property is selling for $120,000, then it should rent for about $1200 a month. If these numbers aren’t close, then I move on immediately. Next, I just plug the numbers into the SingleFamilyResidence excel document. I cannot share an excel file in Facebook, so just pm me with your email and I will get you a copy. I have attached a pdf for you to see as a reference. The county auditor site has the annual property taxes and it’s simple to look up the annual insurance, management fees, and loan assumptions. I just plug those numbers into the excel document. The vacancy rate varies with time, but right now it’s pretty low so I’m comfortable with a low vacancy rate. Maintenance rate varies depending on the quality of the real estate. A brand new piece of real estate or one that you’re going to fix up will have a very low maintenance rate versus one that’s older and hasn’t been upgraded recently. I will then enter the finder’s fee based on how often I expect to need a new tenant. Finally, I enter a capital expenditure (Cap-Ex) rate. While maintenance is small short-term things that need to be repaired, Cap-Ex is money I set aside for long term expensive repairs such as a new roof or new furnace. That’s it, the excel document spits out monthly cashflow and how long it will take to get my money back. That’s how I determine if a real estate deal I’m looking at is a good investment or not. It’s also how I compare one real estate deal to another. I would like to get my down payment back as quickly as possible and I would like to get as much cashflow as possible. I personally never plan for appreciation, I do not factor that into my calculations. If I get any appreciation, that’s just a bonus to me. If I do get appreciation, my plan is to sell the property and 1031 it into another one, or if the rents increased enough from when I purchased it, I can refinance the property, take some money (tax free by the way) out to buy another piece of real estate.
As most of you know the unique thing about single family residence real estate is that it’s value is based off of comps(comparables). This means that the value is based off of the price of other homes in the surrounding neighborhood. This is not how commercial real-estate is valued. Commercial real-estate is valued based off how much rent it brings in. The fact that single-family residences’ value is based off of comps can work both for and against you. It’s your job to analyze the current market conditions and make it work for you. Similar to riding a bike, after you analyze several real estate deals, the math is easier than high school algebra.

Vincent Cyran