Hey, Winston here and today we are going to talk about how to run your numbers if you're
looking at buying a new home or building a new home or whatever assets you want to buy.
How do you run the numbers?
How do you figure out whether you're going to make a profit or not make a profit regardless
of what you're buying?
So this right here we're going to be talking about buying a home obviously because that's
what I center around but you can take what we're talking about and you can apply it to
whatever you would like to apply it to.
So we're going to buy a home right now and the cost of that home is going to be $200,000.
When you're running your numbers you're going to insert whatever number you think you're
buying this house for or whatever number you're offering on the house and you're going to
put your number there.
That number interchange is whatever you want to put in there.
The next thing we're going to do is we're going to figure closing costs.
Now I'm figuring closing costs at 6% on this because this particular deal as we're looking
at it, I'm sorry at 3%, we're not paying for a bank to do anything.
This is an all cash deal so we're not paying as much in closing costs.
If we had a bank loan being done there would be some origination fees and some more costs
that's added from the bank side.
So we're not doing that on this one.
So that closing cost if you're doing a loan or something that may go up to 4% to 6% somewhere
up in there.
You just got to call your bank, find out what it's going to cost for origination fees and
everything on your loan.
I'm going to go through this real fast.
What are our closing costs?
We've got attorney fees, origination fees from your bank, we've got prepaid interest if you're
going to buy down your rate, escrow deposits, that's taxes and insurance you put in a deposit
so that the bank always has that money to pay your taxes and insurance when it comes
due every year and you don't have to actually save for it.
Recording fees, there's going to be a fee to record it with the state and the county.
There's going to be a fee that they're going to charge you to underwrite it, they're going
to check over your books, they're going to make sure everything is legit, everything
is okay, you can afford to do it and they're going to charge you a fee for that because
that takes time for somebody to do that.
Then they're going to have some prorated taxes they're going to do, some insurance, home
inspection fee if you're going to get a home inspection which I would definitely recommend.
So on this particular house we said we had 3% closing costs.
I'm also looking at the house and I'm like okay I've got to put some money into it so
we're going to put a new kitchen in it, we're going to put a new roof on it, we're going
to do several things to it.
So I'm going to do $48,000 worth of repairs so my total investment in this particular
home will be $254,000.
That is going to be the number we're working with, the $254,000 for the purchase price.
It will include all of this.
That's total out of pocket money.
Our yearly revenue is going to ramp for $2,500 a month, $2,500 a month, we multiply that
times 12 months and what do we get?
$30,000.
Simple math, even Nick can do that math.
You can do that right?
Probably got to have your phone out and stuff like that still maybe.
It's amazing how dumb we get as I am getting more and more like I use my phone for everything
where I used to never use it.
Two times six.
So $30,000 a year on revenue.
I'm going to do the revenue, I'm going to do everything by the year, not necessarily
by the month.
A lot of times when I break stuff down I'll break it down yearly and monthly because I
want to look at it both ways.
But ultimately to get my return on investment I need to know what I'm going to produce for
a complete 12 month period of time.
Now we're going to do a vacancy factor.
What is a vacancy factor?
A vacancy factor is I'm going to look at that house and I'm going to say well you know once
every 14 months that house is going to come vacant.
Once every 14 months it will be a 7% vacancy factor.
So what I want to know is I want to know if this house goes vacant and I am really getting
by by the skin of my teeth in my financials every single day.
So I don't have a lot of extra money to come up with $2,100 for this month if I needed
the $2,100.
So I need to do that.
I charge a vacancy factor then I would divide that by 12 and I would put that much money
into an account every single month.
So at the end of the year I have that money in an account and then I would let it build
up a little bit too.
So you just keep on putting it in there.
If you don't use it you don't use it but at least have it there that way you always
got that cushion and you don't have to worry about it.
So vacancy factor is always important.
I use one month every 14 months pretty much on everything.
I never use less than a 7% and this would be unique to your investment.
I mean if you go into an assisted living place and you're renting out a room to somebody
that's in assisted living you may be renting to them until the day they die.
So you don't have a huge vacancy rate.
If they're 85 maybe your vacancy rate may only last 12 months.
If they're 65 you may have 10 years, 15 years they're going to rent from you in that little
portion of real estate that you own.
So it is unique.
You got to figure it out but I'm going to tell you right now before I would ever undercut
it and try and make my numbers look good I would overestimate it and make my numbers
look bad because I want my numbers to work in the worst case scenario just like I want
them to work in the best case scenario.
So if I figure my numbers up and they don't work in the worst case scenario I need to
walk away from that deal because if I don't then that's going to cause me eventually
it's going to cause me some type of a failure, catastrophic failure.
So the total revenue will take the $30,000.
We'll subtract the $2,100.
Now we've got $27,900.
We're going to use that number as far as our total revenue rather than using the $30,000
because I want to take into consideration this vacancy factor.
Now after we do the vacancy factor I'm going to put in here property management fees and
I'm going to use 8% on property management fees.
You say well I'm not going to use a property manager I'm going to manage it myself and
I manage my own properties but my labor isn't free.
The people that work for me their labor isn't free.
So if you're going to manage it yourself you should get paid for that time you spend
managing it.
And if the business won't pay you for the time you spend managing your home then you
probably don't need to get that home.
If you start saying well I'm not going to charge you, I can spend time over there I'm
not going to charge that.
At least understand that you're cheating yourself out of a little bit of profit on
that.
I do that myself sometimes on stuff.
I mow my own grass because I want to and I look at it like I ain't doing nothing else
so I just go mow the grass.
That may be your case that's fine but just understand it.
That $2400 something happens to you and your spouse has to come in and manage that right
there do they have the ability to manage it or are they going to use a property manager?
If they're going to use a property manager it's going to cost them 8 to 10 percent.
We need to put that in there so that when they run the numbers it's there.
Never leave any numbers out there may cause you some issues.
Next thing we're going to consider is insurance.
So we've got a $254,000 house that insurance is going to be about $1500 a month or I'm
sorry a year.
We've got to put that in our equation.
Next we're going to go into our property taxes.
How much do we need to pay in property taxes a year?
Understand whenever you're buying a piece of property that if you look at Zillow you
look at the different places they have property taxes they're going to give you the property
taxes on this house but the property tax is going to be at whatever value it was assessed
at the last time.
So if somebody bought it and they raised it 2, 3, 4 percent a year, year over year over
year and it doesn't keep up with inflation and you go buy it and their tax appraisal
says it's at $160,000 and you got it at $250,000 and that's what you got in it.
They're going to charge you $250,000 on your taxes so it's going to go up that much.
So understand you need to do the math on that right there on your property taxes.
Do not assume anything.
Do not assume anything on insurance.
Call an insurance agent and find out that the insurance is going to be right.
Make sure that you know exactly what you're going to pay and don't guess and don't take
fictitious numbers off of Zillow and different sites like that.
Verify with your local provider, whoever you're using for your insurance, your local real
estate agent will help you get some of the property tax and stuff.
Just make sure you got everything.
Don't just run off of it, get it.
Make sure it's right.
It doesn't do us any good to go out and work our behinds off and work our behinds off and
save up and save up and save up and go buy a house and that house still costs us money.
We got to get that right.
We're going to put a maintenance fee in there of $500 so I figure $500 a year on maintenance.
All of my properties whenever we put them in there 100% I don't rent something that
isn't.
So if you're renting a property and you say well it's going to need a water heater then
you need to put something in there so you can replace that water heater in 12 months
or whatever it is.
Add a little bit of money to an account.
You got stuff that needs to be done to it.
You have to figure in.
If your air conditioner is 10 years old you may have a couple of service calls in that.
Those service calls may cost you $800 a year if you're not careful.
If you got a bad water heater that's going to cost you more.
If you don't fix it in a timely manner and you got to fix it on a Saturday because that's
when it breaks that's going to cost you twice as much money to fix it.
So just pay attention, pay attention, pay attention.
But I use a $500 number on that and I got multiple properties so I kind of spread that
across everything and I dial a cost average on some of that also.
You have to do what works best for you.
So in legal and accounting I factor in about $400 a year to cover any legal expenses I'm
paying to if I got to talk to an attorney about something or anything like that.
And then I also have accounting I'm going to pay my accountant something for each individual
property that they're managing for me so I got to pay the piper.
Next thing I'm going to do is I'm going to take my total expenses so I add all my expenses
up that comes to $8,500.
That's going to be our total expenses.
We're using a $27,900 as our total revenue.
That's going to give us $27,000 minus the $85,000 is going to give us $19,350 a year
that we make off of the house.
We take all our expenses out of it for the year.
We put all of our revenue to $30,000.
We take out the vacancy factor right there and now we've got $27,000.
We're taking everything from a worst case scenario.
What if this happens?
What if that happens?
What if we make it?
We make it and yes, we got $19,000 so let's see what that return is.
To get your return what you got to take is $19,350 and you have to divide it by that
$27,900.
I'm going to fast forward through your slide right here.
While I say that we'll just go down and read it.
So right here we're talking about your rents equaling your income and whenever we're figuring
everything out we want your total expenses.
That means every single expense you have.
If you're going out and buying a nail it needs to go into that property.
We need to charge it off of that property and we need to know where our numbers are.
Take your rents, subtract them from your expenses.
This gives you your total cash flow.
We just saw that on a previous slide.
Your income minus expenses is cash flow.
Other known as your net operating income.
NOI total cost of property gives you your return on investment.
So your NOI divided by total cost of the property gives you your total return on investment
and that's what it's all about.
We're going to invest money.
We want to know what we're getting for it.
So now we divide that.
It comes to 7.6%.
So that would be a cap rate or that would be our return on investment.
Some people have struggled with the fact that I'm using the word cap rate.
That's just how I was taught.
Cap rate is used more on commercial than it is residential.
But it's the same thing.
Your return on investment, your net operating income, it's all the same.
It doesn't matter.
So I got 7.6% right there on the cap rate.
Would you buy it for 7.6%?
I think right now in today's market, Nick, 7.6 is about as good as it gets.
It's not a bad return right now and it ain't what it was a couple years ago but it's not
bad.
All right, we're not going to go over that.
We'll come back and do a different slide in a little while.
That covers running the numbers.
Y'all have a great day.