Running the Numbers on a Rental Property

Looks like our long ‘no rental properties’ drought might finally be over. I am superstitious enough to not act like this is in the bag yet, but.

Our offer was accepted and we are under contract.

Bit of a Fixer Upper, I know.

I figured I would lay this process out in a number of posts. I do not want to show a picture of the ‘real baby’ yet because things could still go south. But I would like to go over how I came to my current position.

If you have been following my saga with real estate, I have come close, but was always postponing or being scared off by something.

I liked this building way back in 2015. I watched it on realtor.com, I drove past it everyday. Me likey the metal roof and solid yet simple looking house.

The very day that I finished my rudimentary ‘running the numbers’ I made the call. Only to hear an offer had been accepted and it was off the market. BTW it had been on for over a year with no takers, I thought I was playing it cool. You know, the long game, trying not to act to needy.

Backfired Big Time. Bit ‘O Bad Luck. Not meant to be I guess.

Fast Forward 2 years, the guy is ready to give up. Doesn’t like the long drive to the property. Destiny Maybe?

I go back to the lab and run my numbers again. This place makes sense. I will call on it again. Wife has given me the prospective go ahead.

I will usually punch out the numbers like; sales price $115,000, down payment 25%. Mortgage at 5% for $86,250. Add in Property taxes at $ 215/month. Insurance policy at $ 73/month. I only pay trash. Rent Due $ 1325/month.

Here are the details on Metrics for Buying Real Estate;

Gross Rent Multiplier = Total price / Annual Rent

GRM = $120,000 / $ 14,310 (90%)

GRM = 8.39

So a number like 8.39 is great.

Lower is better. Big markets like NYC the GRM can be 15- 20 or more.  We like that 8! Our number is on par with repressed markets like Detroit.

One Percent Rule = Monthly Gross Rent >= Total Purchase Price

OPR = $ 1,325 >= $120,000

OPR = yes

Total Purchase Price is higher b/c I have added in ‘closing costs’.

CapRate = Net Operating Income / Total Purchase Price

NOI = Gross rents – all expenses except for financing

CapRate = $ 10,902 / $120,000 = 9.0%

One More from the ‘Common Metrics’ formulas;

Net Income After Financing = NOI per month – Financing Costs per month

NIAF = $ 908 – $ 424 = $ 484 cash money every month!

Hurry, call the realtor Again!

Guess what, this time there are 2 offers on the property and it is again ‘off market’, Again.

A week later I am scanning real estate and funny thing is, the property is relisted.

Turns out the financing has fallen through on this property with 6 different buyers. What is wrong you ask? Tune in part 2; Zoning Madness which I will release as soon as I am sure I was able to actually master this dilemma.

What other Metrics do you run on a potential property?

Coach Carson also has a great post outlining all the different methods used to calculate the value of a potential rental property; HERE.

6 thoughts on “Running the Numbers on a Rental Property

  1. wild turn of events that keep having this property prop up.

    Hopefully it’s a sign that it was meant for you.

    Did the price increase dramatically between the first time you offered and now?

  2. I’ll be interested to watch you go through this process. Real estate is definitely more work than equity investments, but the numbers on that property look solid.
    Got a text this morning about mice at my rental property.

  3. Other than getting a feel of the rental property’s potential market rental rate, I considered whether I could still afford such property even without the rental income coming in, in cash SHTF. But that’s just me as I’m fairly risk averse. Fortunately, ended up paying the rental property in cash.

    Hope your purchase works out! Being a landlord isn’t so bad. I’ve found it best to cater only to long-term tenants. Less wear and tear on your property and they usually take better care of the property unlike short-term tenants.

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