I'm an e fig real estate investor and
had 87 Doors by the time I was 23 and in
this video I'll be showing you how I
analyze rental properties today so if
you guys want to have a pen and a paper
in front of you so we can make my time
and your time more efficient I'll be
showing you step by step exactly how I
analyze numbers on a rental property now
before we begin here are some important
key pieces of terminology for you guys
to know should pop on the screen right
now so as you guys can see there's some
stuff like scheduled gross income net
operating income Debt Service operating
expenses expense ratio and cash flow and
I thought the best idea for me to share
what those concepts are and how to use
them in analyzing a brenal property is
to share an actual deal that I did many
years ago and you guys can follow along
and analyzing what the numbers were and
how much I actually ended up making from
that deal in fact here are some photos
of that 8 unit apartment building I
bought years back now on a side note I
actually ended up buying this building
with absolutely no money down but that's
a video for another day scheduled gross
income is rent you've scheduled to
collect based on your current leases so
for example for this8 unit building
we've managed to secure leases on all
the units for
$950 per unit after stabilization now
stabilization was not part of the
terminology that you guys saw in the
beginning of the video but what it
pretty much is is the process of getting
all the units ready and leased out now
the process for stabilization for this 8
unit property was an absolute nightmare
I mean in fact when I first took a look
at this place with my property manager
we had hot water heaters that bursts and
it flooded some of the lower units it
was four units up top four units on the
bottom we had three squatters in there
which I live in Illinois and this deal
wasn't Illinois and unfortunately we
have a lot of laws that for some reason
protect criminals and squatters but
there was three squatters there I mean
there was an absolute mess now I don't
have any before photos but it looked a
little something like
this now thankfully we've been able to
put a lot of work in fact we raised I
think $150,000 to do the rehab and you
know get all the units ready and leased
out but thankfully the tenants that we
put on there after it got stabilized all
paid on time in full that's actually
what leads us to our effective gross
income which by the way there's two
different types of gross income you're
going to have effective gross income and
then you're also going to have scheduled
gross income so scheduled gross income
is the money that based on the leases
you're scheduled to collect so if you
have an 8 unit building and each unit is
ring out for $11,000 that's $8,000 a
month
$722,000 for the year however your
effective gross income is the money that
you actually collect by the end of the
year so thankfully again because our
tenants that we put in there after
stabilization all paid on time and in
full our effective gross income and our
scheduled gross income were the exact
same number so in fact with eight units
we rented each unit up for
$950 and doing the math right if you
guys want to follow along with me we
have 8 *
950 that is
$7,600 per month now obviously the
Romans for some reason decided that they
were going to be 12 months in a year so
we go ahead and multiply that number by
12 and that's going to give us
$91,200
and that's what our schedule and our
effective gross income was in the first
year after we stabilized the building
now I'm sure a lot of you guys are going
to ask this question Daniel how long did
it take you to get everything done it
actually took us a full 18 months to
take care of all the issues that we have
with the property some we had to gut the
units unfortunately uh because there was
flooding as well we had to bring in
humidifiers and replace all the flooring
and whatnot so it was a bit of a long
and expensive process but year one we
were able to collect
$91,200 now that being said obviously we
don't take that full $91,200 home we
have these things called operating
expenses which are expenses that you're
going to incur as you operate the
building now some of the most common and
most expensive operating expenses that
you're going to encounter as a landlord
and as a real estate investor are stuff
like
taxes which for me as an Illinois
resident is absolutely brutal some of
the investment properties that I've had
in my career were 15 18% of gross income
going towards taxes because again I
don't know why I'm still here actually o
look Homer the
IRS maybe you guys can tell me where I
should move to right but we have taxes
we also have insurance we have stuff
like utilities maintenance and for those
of you guys that are not interested in
managing the property for yourself and
you know taking calls at 3:00 a.m.
because the toilet's broken you're also
going to pay a management fee and
management fees are typically structured
in uh relation to the income so it's
going to be a percentage of what debt
gross income is going to be most
property managers are going to charge
somewhere between that 6 to 12% of your
total gross income my manager charged me
8% for this particular deal so outside
of management fees you're going to have
little things here and there like you
know travel you're going to have stuff
like legal fees now if you have a really
good CPA or very good tax professional
that prepares your taxes uh the tax form
for reporting your income and expenses
for your rental properties it's either
going to be what's called a Schedule E
or a form 8825 just depends on how you
hold the asset if it's in a partnership
if you have it in a trust etc etc but
for the most part when it comes to your
operational expenses your big three as I
like to call it is typically going to be
the maintenance the utilities and the
biggest one usually are the taxes
because how else are the ukrainians
going to get their money now calculating
all these numbers is what's going to
lead us to what we call the expense
ratio which the expense ratio is the
percentage of your gross income that's
going towards your expenses hence the
name expense ratio now a fun fact the
average expense ratio for a rental
property in the United States last year
was
47.3% and which is true cuz most rental
properties that I analyze are usually
going to be between that 40 to 60 range
it's usually going to be about half of
your total gross income and in our case
our expense ratio was actually a little
lower at
45% which means that our net operating
income which is the income that you
collect after all operational expenses
have been paid was actually if you do
the math so
$91,200
multiply by
0.55 now the reason why I'm going to
multiply by 0.55
is because 45% of our gross income went
to expenses which means 55% actually
went towards our net income so I'm going
to go ahead and take that $91,200 and
multiply it by
0.55 which gives us
$1,160 as our net operating income now
that being said we're not done quite yet
we have this thing called Debt Service
RIS which at the end of the day is the
mortgage payment that we make to our
lender so just like how you know maybe
you or your parents or anybody if you're
living in a house that has a 30-year
mortgage attached to it you're going to
make that mortgage payment every single
month well same thing here with
investment properties and in this case
our mortgage payment was actually to the
seller because with this deal we bought
it on seller financing which for those
of you guys that don't know seller
financing is a deal in which the seller
carries the note and provides the
financing versus a Traditional Bank like
most people would do now there's a lot
of pros and cons when it comes to seller
financing mostly Pros in fact we have a
free three-hour course on seller
financing on how to find them how to
negotiate for it what it even is the
pros and cons and how to structure it
I'll leave that in the description for
you guys to check out now that being
said here were the terms that we bought
this deal on so if you guys don't have
already uh download Carl's mortgage
calculator k a r l apostrophe mortgage
calculator now I'm not an affiliate I'm
not financially tied I don't make money
by having you guys download the app or
anything like that it's just an app that
I've used for over a decade now uh for
my real estate investing properties and
so if you follow along there's a little
section called property value and uh
which is actually the purchase price and
we bought this building at
$250,000 now a lot of you guys
especially for those of you that live in
California probably fainted because
you're like holy cow $250,000 for an 8un
apartment building like our shed cost $2
million right uh well and that's because
that when we met the seller he was
actually a very highly distressed and
motivated seller now his life wasn't in
distress he had like a private jet he
was very well off he was a very rich
dude and pretty much bought this 8un
building in the 8s for tax purposes and
because he was getting so much trouble
with the tenants and now the city was
calling him to go to court because he
wasn't really taking care of this
building at all cuz he had way too much
money outside of this deal he was
willing to sell it to us for what he
bought it for in the80s which was
$250,000 and we solved his problem by
going to court on his behalf as the new
owners and taking care of all the mess
that this apartment building had
associated with so our mortgage payment
as you guys see with all the terms right
so property value of $250,000 0% down
payment 4% interest 20 amortization as
you guys can see in your calculator our
payment ended up being
$1,514
195 per month now if we annualize that
number so we take that 15
14.95 we multiply it by 12 our annual
mortgage payment is
$1,179
40 right so that is what we call our
annual Debt Service is what we owe to
our lender uh at the end of the year or
in this case scenario every single
quarter because we're making that
$154.95 payment to our seller every
single month now this leads us to
calculating our cash flow now cash flow
is the money that you take home after
all operating expenses and Debt Service
has been paid so in this case what we
have to do is we have to take our noi
cuz that's the number that we have after
all operating expenses have been paid
which was
$50,605
18,1
7940 so we just do the math there right
subtract 50,60 - 18179 40 and that
should give you a cash flow of
$31,988
and boom that's the number that we took
home every single year uh by being
owners of this 8 unit property now funny
enough this was actually my very first
multif family apartment deal up until
this point My Brother Sam and I will buy
a lot of single family rentals and
portfolio of single family rentals and
this was my very first multif family
apartment deal and there were a lot of
ups and downs especially in the
stabilization ation process but
obviously bringing home $32,000 a year
in passive income through real estate
cash flow was definitely worth it in the
end and I did a lot more deals like this
to have 87 doors and be a real estate
millionaire by the time I was 23 years
old so if you guys want to see the full
journey of how I did exactly that go
ahead and click on this video that you
guys see here in the end screen and
until next time I'll see you guys in the
next one