Let’s debunk some common myths about real estate investing, and share what it’s ACTUALLY like, no sugar coating – enjoy! Add me on Snapchat / Instagram: GPStephan
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Here is EXACTLY how to calculate and analyze the cashflow of a rental property anytime you invest in real estate…and make as much passive income as possible! Enjoy! Add me on Instagram: GPStephan
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Brandon Turner from Bigger Pockets video: Calculating Numbers on a Rental Property [Using The Four Square Method!]
This is probably THE MOST important step anytime you’re looking for an investment…this one single calculation tells you EVERYTHING you need to know about the property….it’s going to tell you how much money you’re going to make, it’ll tell you how much a property is worth, and it’ll tell you how much you should offer on the property to get your ideal ROI.
Anytime you’re evaluating a property, you’re going to have to calculate the GROSS INCOME. This is the TOTAL amount of income the property will be generating, BEFORE expenses.
In addition to rents, it’s important to calculate any other income that property generates.
For example, I’ve seen some properties that have laundry unit income
I’ve seen some that charge separately for storage.
Some that charge separately for parking.
Now we need to go to the next step: EXPENSES.
Anytime you own a property, you’re going to have FIXED EXPENSES NO MATTER WHAT – this means that even if you bought the property outright IN CASH, NO MORTGAGE, you’re still going to have these expenses…they’re fixed, and there’s no way around it.
These expenses include:
Property taxes – that’s unavoidable
Insurance – you better have insurance
If there’s an HOA – I don’t like HOA’s
If you pay utilities for the tenants – make sure they save water
Normal upkeep – like a gardener, pest control, etc.
Repairs that need to be done
If there’s any management fee
And vacancy when inevitably a tenant will move out and you’ll be missing out on that rental income
After that – we’ll need to calculate our NET RENTAL INCOME. Subtract EXPENSES by GROSS INCOME and this is your net income. From this, your can calculate your CAP RATE:
Divide the NET rental income by the purchase price, then multiply that by 100, and what you have left over is your percentage return.
Next, we need to calculate the Mortgage Payment. Use http://www.MortgageCalculator.org to calculate your mortgage payment.
From there, subtract your mortgage payment from the NET RENTAL INCOME and that is your return!
But then we also have the RETURN ON EQUITY. Remember, every month you pay down your mortgage, part of that payment is interest on your loan balance, the other part is EQUITY towards paying down the loan…because remember, after 30 years, you’ll have no more mortgage and you’re owning this out right. So every month that goes by gets you closer to that goal.
In order to calculate how much equity you’re paying down, lets go back to MortgageCalculator.org, look under “calculate” where it says “show amortization schedule.” Then click “show annual amortization.” Then hit calculate.
So now, we add this back into our income, and that becomes your TOTAL ROI.
And that’s exactly how I calculate the cashflow of a property. With this entire formula, you can pretty much just plug in your own numbers and spit out the expected return!n!
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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to over 0 million in sales: https://goo.gl/UFpi4c
First expectation: Real estate investing is passive.
The reality is that creating the type of rental property to the point where it’s passive income takes a LOT of work. But the work is, at times, still ongoing. Eventually you’ll have a vacancy. Eventually you’ll need to fix things up again. Nothing will last forever. Sure, you can get a property manager who’ll handle much of this for you – but you will need to do SOME work yourself, even if it’s as small as choosing between finishes or approving bids on work. It won’t be an insane amount of work, but it will be something. So yes, real estate CAN be fairly passive…but it’s not passive if you don’t put in the work UPFRONT.
Second Expectation: In order to invest in real estate, you need to do the repairs yourself or be a good handyman.
The reality is that I can’t do anything besides change a lightbulb. While I do know some landlords who do the work themselves to save the money, this is absolutely not a requirement – and depending on how much your time is worth, it’s often cheaper just to pay someone else to do it the right way. It’s also worth noting that since all these repairs are a write off, you can write off the costs against your income…but, if you do the work YOURSELF, you cannot deduct the cost of YOUR OWN LABOR.
Third Expectation: It takes a lot of money to start.
The reality is that it often takes 10%-25% down to begin investing in real estate. This COULD be a lot depending on your definition of “ a lot,” and also on your area. Buying a property in Los Angeles would be significantly more expensive than in Kentucky, for instance. Where one person might be able to buy a property for ,000 down, someone else might need 0,000.
Fourth Expectation is that it’s often like the TV shows.
The Reality is that it’s NOTHING like what they portray on TV. Oftentimes those TV shows will be loosely scripted around creating drama and creating a show that’s actually interesting enough to watch all the way through. Every episode needs a goal, a problem that arises, a solution to that problem, and then a resolution at the end. The real life problems that come up just aren’t that exciting or interesting. It’s often boring and mundane.
The fifth expectation is that you’ll make a lot of money investing in real estate.
The reality is that oftentimes one property won’t make you rich. Most mom and pop landlords won’t make a lot early on, but as they scale up, they can earn a significant amount of money from a lot of smaller sources. This is how many landlords start making money, enough to quit their jobs and invest in real estate full time. It’s growing your portfolio over one or two DECADES and accumulating those properties that might make you only 0 a month….but buy one of those every 18 months, and in 15 years you’re making 00 per MONTH. That’s how most landlords make their money, and make a LOT of it. But the beginning will be slow and frustrating until you begin adding more and more to your portfolio.
For business inquiries or one-on-one real estate investing/real estate agent consulting or coaching, you can reach me at GrahamStephanBusiness@gmail.com
Suggested reading:
The Millionaire Real Estate Agent: http://goo.gl/TPTSVC
Your money or your life: https://goo.gl/fmlaJR
The Millionaire Real Estate Investor: https://goo.gl/sV9xtl
How to Win Friends and Influence People: https://goo.gl/1f3Meq
Think and grow rich: https://goo.gl/SSKlyu
Awaken the giant within: https://goo.gl/niIAEI
The Book on Rental Property Investing: https://goo.gl/qtJqFq
Favorite Credit Cards:
Chase Sapphire Reserve – https://goo.gl/sT68EC
American Express Platinum – https://goo.gl/C9n4e3
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