I often see fellow real estate investors struggle to run the numbers on prospective rental property investments.
While I happen to love numbers and math, I recognize that I am in the minority.
Most people are sitting down, knowing they have to get deep into something they really hate doing. It doesn’t help that this is high stakes stuff!
Run your numbers incorrectly, miss something important, or be overly optimistic and you very well might find yourself in a bad deal.
That sucks, and if it happens, there’s likely little you’ll be able to do but wait for time to bail you out.
Luckily, running the numbers for rental properties doesn’t have to be all that hard or complex.
I do this multiple times every single day. And I’m going to share with you the exact, simple spreadsheet I use for my own analysis. I’ll even link you to a Google sheet so you can download a copy and use it yourself!
But first, let’s look at two huge mistakes I see people making time and time again.
Mistake #1: Using Complex Rental Property Calculators
I often see people flock to online rental property calculators. You throw in some inputs, click a button, and you get a nice looking graph that depicts cash flow and returns that stretch decades forward.
These calculators are great for making the future look smooth, easy, and predictable.
The reality is, real estate investing is none of that. As a result, newer investors have unrealistic expectations and freak out at the first signs of trouble.
The other danger with rental property calculators is their ability to allow you to over optimize them. Maybe you’ll tweak that capex/vacancy/repairs line item juuuuust a little bit.
Suddenly that forward looking chart looks a lot better and you’re feeling confident about the deal.
When you’re looking decades out, planning for rent increases, appreciation, and mortgage paydown and justifying returns with these inputs it’s easy to make some seemingly harmless adjustments to the inputs.
It’s a slippery slope!
Mistake #2: Not Properly Calculating Cash Flow
The other big mistake I see people making is simply not properly calculating net cash flow.
This is done by either completely omitting key inputs or using incorrect data.
I’ve seen it all. People will claim they are “cash flowing” a certain amount per month when all they’re doing is subtracting their mortgage payment from their gross rents.
Oof!
Or they use estimates for expense items when the real numbers could vary wildly.
These folks aren’t actually calculating anything of value. They are being lazy, failing to do the most basic analysis before making a rental investment.
So let’s get into how to do it right while also keeping it simple and fun.
My Actual Rental Property Analysis Spreadsheet
When I look at potential rental property investments I am only concerned about what the numbers look like today.
That’s extremely important. I’ve actually seen agents mislead buyers by helping them run their numbers with artificially low interest rates because that is “more historically accurate”.
Please don’t do this. Focus on the here and now, because that’s ultimately the only thing we can control.
I also don’t worry about future appreciation when it comes to my calculations. If I’ve done my market research I’m already investing in an area I believe in. There’s zero chance I’ll be able to project what it will look like going forward.
And I don’t concern myself with mortgage paydown or rent increases, etc. Yes, those things should happen, but they are icing on the cake.
This is all I look at:
These may still look a little confusing. And you might be wondering why I have two different rental property analysis spreadsheets in the first place.
Don’t worry, I got you.
Let’s start by looking at our first one in a little more detail to understand exactly what’s going on.
Start By Calculating Unlevered Cash-On-Cash Returns
I always like to look at unlevered returns initially. Unlevered is simply a fancy way of saying you don’t have a mortgage on a property (aka leverage).
You buy it cash and you hold it cash. This is the “cash hold” rental property analysis spreadsheet I showed above:
The line items you see in orange are ones you need to manually input. Everything else is auto-calculated in the rental property analysis spreadsheet that I use.
Here’s a quick rundown of each line:
- Purchase price is simply the price you’re paying for the rental property
- Rehab is the amount you expect to spend improving the rental (this might be $0 if you buy something turnkey)
- ARV stands for “After Repair Value” and is what you expect the home to appraise for. This might be the same as your purchase price if you buy on the MLS and don’t plan to do any renovations.
- Rent is the monthly rent you expect to receive.
- Property management is your monthly property management expense. I have this formula set to 10% of gross rents.
- Taxes are your monthly property tax payment. Understand how to look this up so it’s accurate!
- Insurance is your monthly insurance premium. If you don’t know what this will be, call around and get some quotes!
- Capex/Repairs/Vacancy is a line item where I assign 15% of gross rents for future improvements (think new roof, kitchen or bath remodel), repairs, and lost rents when the unit is vacant during turnovers.
When you subtract all of these expenses from your gross rent ($1,200 in this case) you’re left with a net monthly cash flow figure ($695).
Our cash-on-cash (CoC) return on investment is a simple formula that multiples our monthly net cash flow figure by twelve months ($8,340) and divides that amount by our total cash investment.
In this case our total investment is $80,000 (purchase price plus rehab).
As a result, we are left with a 10.43% CoC return.
The reason we want to look at unlevered returns is so we can compare the rental property investment returns to other markets or even other investment vehicles.
I could run the exact same rental numbers on a house in San Francisco and a house in Detroit and see what kind of return I’m earning on my cash. I could also compare those returns to what I might earn with a dividend stock or bond.
Once you add in leverage (via a mortgage) the entire picture can drastically change.
Do The Same Thing But Add In Leverage
Luckily, adding in a mortgage doesn’t change our rental cash flow calculation process much at all!
Here’s a look at the exact same example from above, but assuming that we utilize a mortgage:
There are only two additional line items here, and one is simply a derivative of the first.
The first is the monthly mortgage. This is a new expense that needs to be accounted for.
But to know the exact monthly payment we need a couple inputs, including the loan-to-value (LTV) and interest rate of the loan.
In the case above, we’re accounting for a 75% LTV which means the lender will loan us up to 75% of the home’s value, or ARV, in our spreadsheet.
This comes out to $71,250 and we can take that figure, along with our expected interest rate and plug it into a mortgage calculator to find our monthly payment:
Easy, right?!
Then our rental cash flow spreadsheet does the rest!
The other additional line item, “cash invested w/ refi” is simply an equation that shows us how much capital we’ll have left in the deal.
In this case, we invested a total of $80,000 and the home appraised for $95,000. We’re able to get a loan for $71,250 which means we have just $8,750 left in this rental property ($80,000 – $71,250 = $8,750).
Our final CoC return formula takes this number, along with our annual net cash flow, and spits out our cash-on-cash return.
This is the exact process I use every single day. And if you want to download a copy of the rental property analysis spreadsheets and play around with them, go for it!
Don’t Overcomplicate Your Rental Property Analysis
The key to analyzing rental property cash flow numbers is to keep it simple.
Don’t go down the rabbit hole of building out extensive models and projections. That’s great if you’re running a syndicate or investment fund.
But chances are you’re simply looking to get started with your first rental property or expand your portfolio a bit.
A simple analysis spreadsheet like the one I’ve shared here keeps it simple while also keeping you accountable.
If you’re still finding this all a bit intimidating or you’re looking for help, please feel free to reach out.