Real Estate Investing: Single Family Rental Analysis - Run The Numbers! | Thomas Greer | Skillshare

Real Estate Investing: Single Family Rental Analysis - Run The Numbers!

Thomas Greer, Investment Real Estate Professional

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12 Lessons (25m)
    • 1. Welcome To Single Family Rental Analysis!

      1:53
    • 2. Class Project

      1:18
    • 3. Investment Model Orientation

      2:14
    • 4. GRM & CoC - Investment Ratios

      2:37
    • 5. IRR & Performance Metrics

      2:08
    • 6. Purchase & Sale Price

      3:22
    • 7. Rent Assumptions

      2:27
    • 8. Debt & Equity Required

      1:32
    • 9. CapEx & OpEx Assumptions

      2:36
    • 10. Search The Market

      1:52
    • 11. Analyzing Your Model

      2:01
    • 12. Conclusion

      1:26

About This Class

This class introduces you to real estate investment analysis of single-family rental properties.  From start to finish, I will show you how to "Run The Numbers" and determine the investment potential of your next real estate acquisition.

I give you MY investment model and walk you through the necessary inputs, assumptions and analysis. 

Upon completion of this class you will be able to take this investment model and use it on any of your next deals.  You will have the skills to assess the potential of your next investment.

If you are a beginner looking to invest in real estate or a a more experienced investor who want to polish and refine their analysis...this class is for you.

  • Learn how to calculate, compare, and analyze metrics like Gross-Rent-Multiple, Cash-on-Cash, and IRR (Internal Rate of Return).
  • Learn how sophisticated real estate investors layout their Revenue, Operating Expenses, Capital Assumptions and Sales Price to derive their Cash Flow.
  • Learn how to better model your deals 

*********************

Analyzing your real estate investment is required to maximize your chances of success.  Learn the "right way" to do it.

This course, will hold your hand from the beginning to the end and discuss each element of the investment model used to analyze your single family rental.

Benefit from a detailed introduction to concepts and the thought-process behind real estate analysis.

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I am your instructor, Thomas, and I have over 20 years of investment real estate experience that includes senior analytical work with private equity real estate funds in US and Asia.  I enjoy helping my clients find real estate solutions.

I can also be found on my website and on Twitter.

Have fun learning and reach out to me with questions, comments and ideas!

Transcripts

1. Welcome To Single Family Rental Analysis!: Welcome to my real estate analysis series. This video serves as an intro to single-family home rental investment properties and covers everything you will need to successfully run the numbers and assess the financial performance of your next single family rental investment. Throughout this class, I will cover one, assumptions and inputs are needed to. Where do you get that information? And three, how to think and analyze about the information you have. You will use this info to create your own financial analysis of a single family home rental property. I am Thomas Greer and I'm the owner of pink line LLC, a bespoke investment consulting company offering analytical solutions and modelling to institutional and non-institutional clientele. I have over 20 years of investment, real estate experience, and senior analytical work across all kinds of fun and property types, both in the US and in Asia. This class is aimed at students at the beginner level with no to little investment real estate experience. You may be a real estate agent of budding investor or contemplating your next single-family home investment, or maybe even have a few properties under your belt. The class does assume that you have a beginner understanding of Excel and are at least able to input values. By the end of the class, you will be able to determine financial performance of single-family home investment properties. Set criteria for finding your next property and you compare competing single-family home investments. So let's get started. 2. Class Project: This course is supported by a class project. How better to learn our new analytical skills then to engage in a project together. The project will be the financial analysis of a single family rental property that you choose. This can be your home, a neighbor, or potential investment you were looking to acquire. I will provide the model template and Microsoft Excel for you to follow along and update. But you are welcome to create your own model from scratch or to modify what I provide. Throughout the course, you'll be given skills to complete your financial analysis. So I encourage you to take notes and complete your analysis in real time as we progress. I also suggest that you don't wait to present, share post your model. Do that here in this community or with friends, family, and associates. Post your progress regularly and ask questions frequently. Also, as this is an introductory course, I suggest that you keep notes and lookup language and concepts that you're unfamiliar with. Of course, Google's and easy way to look up any term. So let's get started with an introduction to our model. 3. Investment Model Orientation: Let's take a look at the analytical model we will be using for our single family rental investment analysis. There are three things to note before we get started. One, you may have another model you would like to use or make That is wonderful and OK. Many of the inputs and analysis will be transferable. Although you may see some slight discrepancies doing a calculation and mythology. To don't get intimidated by lots of numbers or inputs, I will walk you through all that you need to know. Three, this is a relatively simple model. You may come across more advanced models in your studies. Let's get started. I will introduce you to the model, but there's no need for you to update information or anything right now. Just sit back and get acclimated. This is actually pretty intuitive. Inputs are indicated with a different color, font, fill background, as is industry standard. This model uses a pink background to indicate you can change the cell. If the cell is not an input, I would highly suggest that you don't change it unless you are comfortable with the formula behind it. So let's keep to just the inputs for now. The model is divided up into three tabs, shown here. Simply click on a tab to access the underlying worksheet. The first tab is simply an introduction to me and indicates what an input looks like. The second tab is labeled inputs and is where you'll spend 90% of your time. This is where all of your data is inputted and some of the outputs are shown. I like to enter all cash that leaves my pocket as a negative number and cash that comes into my pocket as a positive. It's intuitive and easy to remember. The third tab is a cashflow tab. It does many of the behind the scenes calculations because this is an introductory course, we will not be addressing this tab often. 4. GRM & CoC - Investment Ratios: Let's talk about ratios and metrics. Basically the indicators of financial performance. Arm, gross rent multiplier is the quotient or result of taking the purchase price and divide it by the annual rent received. The lower the number, the higher rents you get at a particular purchase price. Two examples. You're looking to buy a rental property for $200 thousand. The estimated rent is $1000 per month or $12 thousand per year. The gross rent multiplier is 200 thousand divided by 12 thousand equals 16.7 times. Now, let's say that you look at another competing investment that cost $210 thousand, they'll likely rent is 100000300 or 15,600 annually. This equates to a G ARM of $210 thousand divided by 15,600 equals 13.5 times. Naturally the question is, if the higher purchase price worth it, do the increased rents justify the higher price? That is what GOARN measures. The lower the ARM, the more rent you get per dollar of purchase price, the lower the DRM, generally, the better. Drm is used a lot and small residential investments as a way to quickly assess a property. So you may be looking for properties with a CRM of ten to 13 times of the purchase price, you would consider higher than that, too pricey or rents just too low to justify the investment opportunity, and you would pass the year one. Cash on cash is the result of taking the cash you received in the first year and dividing it by the cash you need, you needed to purchase the investment. So if you think you'll receive cash in the bank after all expenses of, let's say, $150 per month or 10000, $800 annually. And you had to spend $40 thousand to purchase the asset, then your year one cash on cash will be 4.5% as what the CRM, you can use this knowledge to quickly compare and assess ONE potential investment to another. 5. IRR & Performance Metrics: The model calculates many useful performance metrics. We will revisit some of these toward the end of the class that said, I want to make sure you understand some additional performance indicators that you are likely to see in investment real estate analysis. If you are using the model provided with this course, you may be asking about this section here. Cash-out, sometimes referred to as contributions equals all of the cash spent by you for the investment. Cash-in referred to as distributions in some contexts, equals all of the cash generated by the investment that you get. Profit equals cash-out plus cash in. Positive means you made money. Negative means you did not. Multiple or multiple of equity equals the cash in divided by the cash-out. One times multiple means the cached in equaled the cash-out, which means you made no extra money. Greater than one, means you made a profit less than one means you lost money. Irr, internal rate of return. This is an introductory lesson, so it may not mean a lot when I say that this is a money weighted measure of return. So I just want you to think of it like this. When people asked for the return or what you made. This is an annual return number, you can quote, this is what you would use. Leverage metrics simply mean after the impact of debt. Leverages sometimes called leverage. Unleveraged. Metrics mean before the impact of debt or unless you now know more than most individuals who invest in single-family homes. Congratulations. 6. Purchase & Sale Price: Let's determine are all in purchase price and net sale price. Recall that cash that leaves your pocket is shown as a negative and cash that comes into your pocket is shown as a positive. Not all models are set up this way, so be mindful into the likely purchase price from your subject. Also known as the contract price. This will likely be readily available from the seller if the home is on the market. If not, we can explore sites like Zillow or Redfin. Using these fights, you can find nearby comparable or like Holmes and come to a reasonable amount. We will revisit this number in the analysis, less of this class as well. Closing costs. Closing cost for the buyer are mostly associated with charges by the lender, and it can be anywhere from two to 5%. Capital cost. These are additional capital costs that gets spent by you right before, during or after the purchase. Think paying for a washer, dryer, or fixing a bathroom that the seller refused to do. Capital costs usually ranged from 0 to 2% of purchase price. Appreciation. How much do you feel this asset will appreciate per year? Now, US inflation is usually in a range from one to 3%. Most real estate will appreciate and keeping with inflation, at least, if you think the price of your home will increase greater than that into a higher number here. If not a lower number, typically, I would expect to see between one to 6% here. Now let's enter the sale year. Now you may say, I'm not selling and I understand. But for the analysis we need the numbers to end. So if you are not selling or want to look at a long-term hold, just enter ten years, which is common industry practice. Otherwise, enter the year you plan on selling. Year four, year five, year six. Closing cost for the seller. For the seller, they're mostly associated with pain. The real estate agents, 3% to the seller agent and 3% to the buyer's agent for a total of 6% of the sale price. For most markets. As such, they range from six to 10% here. Capital cost. Do you need to repaint RED carpet or reroute the property before sale, maybe replace your hot water heater? Well, this inputs for that. 7. Rent Assumptions: You will enter rent assumptions in the operating assumptions section of this model. Here, we will enter the monthly rent them out and the annual increase percent. Let's dive deeper into ran. The best source for where to find achievable rents will lead as someone who manages lots of single family home rentals, a property manager. Of course, there's always Zillow and various apartment rental websites. Ask yourself, would you rent this home? And if so, how much is there a cheaper or better alternative nearby? Was the home rented in the past? So do your research. Next. We will input the annual increase amount here. Similar to the rent. You need to mix research with common sense and your own personal history and opinion. Keep in mind, realistically, you should be able to raise rents in keeping with inflation depending on your property manager or how well you maintain the home, maybe more. Take a look at how rents are moving in the area to get an idea. The annual increase may also be called a rent step or rent a bump or something similar. Depending on the model you use, basically is all the amount you feel that market rents will increase. Lastly, we will input our vacancy percentage. This input reduces rent by a percentage to reflect the reality that you likely won't have perfect 100% occupancy every year. Even if you find a tenant, there may be a month or a partial month downtime as they move in. It takes a week at best, to move into a new tenant. So the percentage vacancy accounts for that typically is around two to 10%, depending on the property. A property with high turnover will warrant a higher vacancy percentage amount. Lastly, note that vacancy percent and real estate modelling is sometimes call it vacancy and credit loss. And is meant to convey that sometimes there is a credit loss or basically a risk that the tenant may not pay. So if you feel that there is a higher risk, increases input. 8. Debt & Equity Required: We're going to move to the debt inputs and by extension, finalize the amount of equity we will need for the project. The debt inputs can be found in the loan assumptions section and a rather straightforward. First, we're going to enter the loan to value. This will determine the actual loan amount or loan proceeds. Basically how much the lender will give us. For a typical conventional loan with no PMI purchase mortgage insurance, the loan to value or LTV will be 80%. A quick reminder, if you don't understand any of the concepts I mentioned beyond the lookout for additional videos that treat them in more detail. So we can see that if the lender is giving us X amount or 80% of the purchase price and the Olin purchase price is Y, then we need to come up with a difference. This is the equity or cash required at closing. Next, we entered the loan term here. And 30 years would be typical for a residential real estate loan. Finally, we enter the annual interest rate at the time is video rates are at historical loads. You may see sub 4% on investment properties, but that definitely will not last forever. 9. CapEx & OpEx Assumptions: Here we're going to input our CapEx and OpEx in the operating assumptions section. Cap-ex is a short way to say capital expenditure, OpEx, operating expenditures. Basically cost. Because this is an introductory video, We are not going to go in depth about the distinction. And for single-family homes, we can simplify and generalize. They are both cash outflows. Any CapEx are entered here in the Capital Reserve input. This is not really a monthly expense, but instead is a reserve or guestimate to account for any future unforseen capital expenditures during operation. Do you need to repair a roof, tear up a driveway, external paint. We don't know when these will happen, but want to set up a cost outflow to account for the fact that they very likely will happen. So the greater the need for capital work during the investment period, the higher this number should be. Next are real expenses. These are the operating expenses. Now, don't forget that for a rental property, your tenant will be paying most, if not all, of the utilities expenses that you usually are responsible for as the owner are insurance, property tax, maybe some small utilities and property management. If you hired a third party, property managers are usually paid a percentage of rent on a monthly basis. If you have other expenses like an H away or homeowner's association, you can enter them here. For most expenses, especially for single family homes. You will have an idea of the amount. If you've ever paid utilities or taxes or insurance on your home, your primary residence, you have an idea of those cost. You have a good baseline. If you're unsure, you can go get quotes from an insurance provider for property taxes. You can check your local county assessor website and look up previous tax payments. Lastly, we can input the annual increase with these mouths. Typically you want to keep these increases in line with inflation. 10. Search The Market: Excellent. We have update our model with our assumptions. Either the assumptions associated with a set of criteria that we're looking for or a particular investment. Next, now let us look at the market to do the following. One. Either finding a property that matches the criteria we are looking for or to validate and triangulate our assumptions to make sure that they're justifiable in the market. There are few sources to search the market. If you are working with a real estate agent, they are likely sending you emails with the list of potential purchases from their local MLS or Multiple Listing Service. You can Google the realtor association in your city or the real estate brokerage, a large real estate brokerage to view their listings. But realistically, the largest and easiest way to look for available properties will likely be Zillow for you. So take a look and try to either verify your assumptions in the market or look and find your next deal, reach out to the listing agent or owner and work on the purchase. Lastly, note that the more you look at the market and get a feel for what's available, the better you will be to assess real estate investments. You need to know what a $100 thousand home looks like in your market or $300 thousand home. What does $2 thousand in rent justify? How many bedrooms, how many bags? The more you see, the higher your comfort level and ability to assess investments. 11. Analyzing Your Model: Analyze and iterate, rigorous and discipline investment analysis is a circular process. You are or should be constantly iterating and adjusting your analysis and your inputs as you obtain more information, you are constantly trying to verify, justify, and triangulate your assumptions. With that said, let's not get carried away. Once you are okay with your underwriting, don't forget your goal to buy your next rentals. So make sure you go out and do that. Let us revisit our analysis and see what we can't learn. They take you through my thought process and how you would review and analyze the information in front of you. Are gross rent multiplier is here. Is that market. Are we happy with that? What is the maximum G ARM that we would accept? What's the maximum GRG IRM in our market? Let's go back to our purchase price and increase that to see what is the highest price we can pay to achieve RG ARM. What is the equity required for that scenario? Do we have the cash now? Do we need to save? Okay, let's change things back. Take a look at the IRR. This is effectively the return on our money. Could we get a better return doing something else? At the time of this video, the stock markets are a bit out of whack, but historically they returned six to 10% depending on the period you analyze. So consider that. How does this investment compare to investing in stocks? What happens if we target a cheaper home and don't assume any CapEx, maybe the vacancy will be higher and the appreciation lower. I think you are now getting the idea of the thought process. So analyze and iterate. 12. Conclusion: Thank you for working along with me and completing your financial analysis of a single family rental investment. The intent of this introductory course was to leave you comfortable with filling in a real estate investment model, such as you have done? And to advance your knowledge about real estate investment analysis in general, there was a lot we've picked up along the way. One, we covered how and where to obtain necessary assumptions to general guidelines for the necessary inputs. Three, how to analyze the results of your model, the performance metrics for how to think about and use our analysis to understand our investment market and other markets. Fun. Undoubtedly, you picked up some vocab and at some Excel formulas along the way. I'll leave you with my investment model and suggests that you learn it, play with it, break it, use it however you would like to be on the lookout for more classes as a cover, other areas in investment real estate. Feel free to reach out to me at www dot pink line LLC.com all the best.