Deep Dive Into Spreadsheet Analysis
Nate Hedrick and David Bright do a deep dive into real estate investing spreadsheet analysis, covering how to analyze a property with different angles, strategies, and methods.
Episode Summary
Nate Hedrick and David Bright discuss the focus of today’s episode, a deep dive and in-depth coverage of the financial side of property investment. In this interactive episode, Nate and David guide you through running the numbers using an example property and the YFP Property Analysis Spreadsheet for Pharmacist Real Estate Investors that they created for you. They provide insight into analyzing a real estate investment deal and how to navigate the current market in a financially savvy way using simple financial strategies that you can apply to your future real estate investments. Nate and David share some of their recent successes with the None to One Group Coaching Program for first-time real estate investors and highlight the area of spreadsheet analysis. They discuss a variety of topics relating to real estate deal analysis, including the 1% rule, the advantages of starting with a simple investment strategy, unexpected expenses that may come up throughout a real estate purchase, what Nate deems negotiable expenses, how to calculate the actual profit from your investment, common mistakes that beginners often make, the importance of accounting for a vacancy as an expense, and the value of running your own numbers. They also take a moment to explain cash on cash return and its importance in investment.
Key Points From This Episode
- The advantages of a simple starting point when investing.
- Highlights of the current success of the ‘None to one’ course.
- The focus of today’s episode: financial planning for real estate investing.
- Nate tells us about an interesting investment in the Cleveland area.
- What the 1% rule is and why to consider it when investing in property.
- The common misconception regarding the rental and mortgage of a property.
- How to calculate your mortgage based on the principle and the interest.
- The incorporation of property taxes and insurance into your expenses.
- What Nate regards as negotiable expenses.
- Property management rates as an expense and what they are based on.
- Why it is important to account for vacancy as an expense.
- What repairs and capital expenditures are.
- Examples of unexpected fees in the property sector.
- How to manage cashflow and why it is important to have reserves.
- Some of the upfront costs to factor in when buying a property.
- Cash on cash return and how to calculate it.
- Aspects to consider when making an investment.
Highlights
“The price that a landlord will pay to insure their property with a tenant in it, can be very different from what you may pay on your own houses and owner occupant for homeowners insurance.” — David Bright, PharmD, MBA, BCACP, FAPhA, FCCP [0:10:23]
“Setting aside money every month needs to happen, and there’s a lot of dependencies on that.” — David Bright, PharmD, MBA, BCACP, FAPhA, FCCP [0:14:51]
“if you’re not a fan of having a lot of debt, and you want to pay that off quickly, that could even be a strategy where you would sacrifice cash flow in the short term to have a paid off property in the long term.” — David Bright, PharmD, MBA, BCACP, FAPhA, FCCP [0:25:05]
“A lot of what’s behind the calculator here is also getting comfortable with how you would define a deal and what would make a property attractive to you for an investment” — David Bright, PharmD, MBA, BCACP, FAPhA, FCCP [0:27:46]
“I‘m never going to assume appreciation is going to go well. It should over the long term, but I don’t want that to be the thing that makes or breaks the deal.” — David Bright, PharmD, MBA, BCACP, FAPhA, FCCP [0:27:46]
“A lot of what’s behind the calculator here is also getting comfortable with how you would define a deal and what would make a property attractive to you for an investment” — Nate Hedrick, PharmD [0:28:41]
Links Mentioned in Today’s Episode
- None to One Group Coaching Program
- Download a FREE copy of the YFP Property Analysis Spreadsheet for Pharmacist Real Estate Investors
- Example Property for this Episode’s Anaylsis
- YFP Real Estate Investing 41: Deep Dive: Repairs and Capital Expenditures
- Join the YFP Real Estate Investing Facebook Group
- YFP Real Estate Investing
- Your Financial Pharmacist Disclaimer and Disclosures
Episode Transcript
[INTRODUCTION]
[00:00:08] NH: Hello and welcome to the Your Financial Pharmacist Real Estate Investing Podcast, a show all about empowering pharmacists to achieve financial freedom through real estate investing. I’m Nate Hedrick, each week, my co-host David Bright and I explore stories from pharmacist all over the country who are achieving their real estate goals, while maintaining a meaningful career in pharmacy. Whether you’re a first-time investor or a seasoned pro, we’re here to provide education and inspiration about the world of real estate.
Please note, this podcast is intended for educational purposes only and should not be considered financial or investment advice.
[INTERVIEW]
[00:00:42] NH: Hey, David. How’s it going?
[00:00:44] DB: Good. Thanks, man. How you doing?
[00:00:45] NH: I’m good, sir. It’s been a crazy week trying to navigate contractor problems at my current rehab. But other than that, I’m doing quite well.
[00:00:52] DB: Yeah, I feel very fortunate that the house project we’re working on right now is really mostly just a paint and flooring kind of rehab. We had to do a roof over the garage as well. The house roof was in great shape. A little one car garage outback, needed a roof there. But we were super fortunate that we got a bid from a contractor and he was able to take care of the roof like three days later. It was amazing. I know with his busiest contractors are right now though, that we found like the unicorn. So, I know that it’s not all that great.
[00:01:19] NH: Yeah. I feel like I’ve had to GCs already come through, tell me, yeah, I can start in two weeks, get this all done for you, and then we’ll totally walk off the job. So, it’s just been a headache. This is the biggest rehab we’ve taken on. It’s a lot of permitting, just a lot of steps, a lot of things to coordinate, so easy to get in over your head if you’re not used to this kind of stuff.
[00:01:37] DB: Yeah, one thing that I know we’ve talked about on the podcast, and we’re also in the midst of talking about in the none to one course right now is there can sometimes be a value in a simpler starting point that sometimes these kind of intimidating stories and just intimidating aspects of real estate investing can cause people to say like, “No, I’m out. Not for me.”
[00:01:59] NH: If you didn’t catch the None-to-one last time, we brought it up or haven’t heard of that before. This is a course that David and I launched this year, with the whole goal of taking people from no investment properties, none, to their very first one. And we’ve had a really great time with our beta test course. We had 10 individuals that have been helping us through the testing of that, and it’s been going really well. So, excited to continue to grow that service. We’re hoping to roll out the next round of classes probably sometime this summer. So, keep an ear out for that. If you’re interested in going from no investment properties today to getting your first one.
[00:02:32] DB: Early in the None-to-one course, one of the things that we cover in depth is how to analyze a property with different angles and strategies and methods because one of the many strategies that we talked about in the course is buying a relatively turnkey property or something that barely needs any work at all, putting 25% down on a conventional mortgage, and handing that over to a property manager. So, really thinking through what’s one of the simplest ways to get into buy and hold, long-term rental real estate investing.
[00:03:00] NH: And we talked about other methods in the course. But in general, most investing methods are just a complex version of that basic idea, right? You’re putting a down payment down, you’re buying a house, you’re renting it out to a tenant, where you add layers of complexity are things like rehab, or things like creative financing. But everything stems from that kind of basic concept of buy a house, put a tenant in it.
[00:03:20] DB: Yeah, and I know we’ve said this in several recent podcasts, or people are probably tired of me saying it. But we do like to slow this down every few episodes and do these deep dives into these topics knowing that pharmacists are very detail oriented. So, pharmacists want more than just surface depth of financial topics. We thought, this would be a great time because we’ve talked about deal analysis, we’ve talked about a lot of these different aspects and pretty quickly, with several different guests that all emphasize the value of running your numbers, knowing your numbers, but what really does that mean and how can we tangibly do that? So, that’s what we thought we’d work through today.
[00:03:56] NH: Again, we don’t want to overwhelm with a complex numbers heavy story on a short podcast episode. So, we’re really going to try to keep this simple. There are definitely more complex strategies out there, real ways to get into the weeds on spreadsheets and formulas. But this is a pretty simple method, right? So, we thought to go along with the podcast, if you’re not listening in your car right now or want to save this for later, we want to give everybody this exact same spreadsheet so that you can follow along with us. All the numbers we’re going to talk about are actually going to be preloaded into that spreadsheet, so you can tap into that if you’d like to. And you can reach that by going to yourfinancialpharmacist.com/analysis. You can actually download the free spreadsheet that David and I put together.
[00:04:38] DB: So, with that, we talked right before we hit record about a property in general Cleveland area. Nate, since that’s your neck of the woods, can you kick us off?
[00:04:47] NH: Yeah, I thought this would be an interesting one simply because this came up. I’m always monitoring a couple of areas that I like to invest in over here and just watching houses that come up and this one was interesting because it popped up. It’s sold. And within a day, less than a day, it was relisted as a rental. So, clearly somebody bought this. An investor bought it, flipped it immediately as a rental property, and so it was kind of neat to see like the purchase price, the acquisition, immediately see the rent rate that they were listing for. I just thought it was a great example of like, we can see what another investor is doing and just kind of evaluate their deal for lack of a better word.
So, this was a 2,600 square foot four bed, three bath house, in a B plus neighborhood. Again, here on the east side of Cleveland. It sold for $265,000 right at the beginning of 2022. Ideally, or we think, this house should read for about $2,700 a month. Again, they bought it for $265,000. And then immediately turned around and listed for rent at $2,700, which is about right for the area.
[00:05:48] DB: One of the things that we’ve had several guests mentioned on different podcasts is this 1% rule, which is a rule of thumb that’s mentioned often in all kinds of real estate investing books and podcasts everywhere. So, the 1% rule, this rule for, again, preached for years, is this thing that if you can get 1% of the purchase price per month, then you’re theoretically going to do okay with your investment. That doesn’t mean that you will do well with the investment, you need to do the math from there. But it’s nice kind of rule of thumb to get you started. It also doesn’t mean that you will get 1% of the purchase price as fair rent. Rent is still market dependent. And just like the purchase price is, market dependent. But when you get to that kind of 1% rule is what we often hear that that can make a house worth further investigation.
[00:06:37] NH: So, in this case, again, you’ll see at the top of the spreadsheet that $2,700 in income. Again, this property is really simple. There are no extra units to rent out. There’s no garage storage to rent out or basement storage or anything like that. It’s a simple property. $2,700 A month as our income. From there, we’ve got to start figuring out all the expenses.
[00:06:55] DB: One kind of common and pervasive misconception is that the rent minus the mortgage payment, equals the monthly cash flow or the monthly profit, however, you would look at that. And I think as we’re going to work through the spreadsheet, that couldn’t be further from the truth. There’s plenty of other expenses that need to be factored in and failing to consider these expenses is one way that investors can get themselves in a lot of trouble. So, let’s dive into each line in this spreadsheet, we’ll walk through these verbally. Again, please download this and check this out so that you can see it as we go. But we’ll go through each line here in just a minute.
[00:07:30] NH: Yeah, and one more time, for those that are wanting to follow along and missed it. It’s yourfinancialpharmacist.com/analysis. We’ll also put that in the show notes. But a really simple way to download this free spreadsheet.
So, we start off right at the top, and you’ll see again, when you get this spreadsheet in front of you that the very first thing that we usually calculate is your mortgage, and specifically your principal and your interest. Those always go together. Even if you escrow out your insurance or taxes or anything like that, your principal and interest will always be together and it’s a monthly payment that you have to make. We’re assuming that the investor in this case did a 25% down mortgage. Again, there are other creative ways to buy a property. But assuming that and throwing it into a simple mortgage property calculator, and using again, kind of a simple four and a half percent, I think we use four and a half percent interest rate on this one. Yep, there it is. Four and a half percent interest rate, we get a little over $1,000. $1,007 a month in mortgage payment.
[00:08:22] DB: So, again, we do not take the $2,700 a month rent, subtract out that $1,007 a month mortgage payment and think that this property would cash flow almost $1,700 a month. We’ve got plenty of other expenses down the line here.
So, the next one up would be taxes and insurance from there. Property taxes in this case, can often be found at some sort of county or township website. There are generally public records that are available online for different properties. And you can go in there and you can pull that information. There may even be other calculators that you can get at or other information you can get out from the county that will predict what the taxes will become after purchase. Sometimes the historical taxes are predictive, sometimes historical taxes would be capped for whatever reason. Maybe it was reduced for an owner occupant, and if it’s converted to a rental, the taxes would increase. So, it’s not simply looking at what the taxes have been, but trying to calculate what the taxes will be. And in this case, the taxes are $650 a month, which for me, where I live this like shocking, but you’re laughing like, “Yup, welcome to Cleveland.”
[00:09:35] NH: Yeah, and in this case, honestly, we’re giving you a bad example because this is the second highest – the city taxes are the second highest in all of Cuyahoga County in this particular city. Again, I really like this area simply because the the B plus neighborhood and all the amenities that go with it, but you pay a lot higher in taxes to get access to that. So, that $650 a month, it can hurt but it comes with the territory.
[00:09:56] DB: Insurance is the other line item there. So, we threw in the estimator $100 a month for property insurance. And so that may be high, it may be low, that would be something that you could check with a local insurance agent. And they should be able to get you a ballpark on there, and you could shop that around and all kinds of things over time. But if you’re trying to get a rough estimate, that would be something to reach out and figure out because oftentimes, the price that a landlord will pay to insure their property with a tenant in it, can be very different from what you may pay on your own houses and owner occupant for homeowners insurance.
So, pricing that out can be helpful. Again, we slot it in $100 is a round number for estimating. But that can be something you can do a little more due diligence on in your neighborhood.
[00:10:46] NH: The next two line items are really the only two things on here that are what I would call them negotiable. So, these are your utilities, and then any lawn or snow or yard care. And both of those things are something that depending on your area, this could be paid by the landlord, or it could be paid by the tenant. Again, it varies based on the lease. It is based on what other properties in the area are doing. Typical for this area is that for single family homes, this is all the tenant’s responsibility. You might see snow removal or lawn care tied in here where that would be taken over by the landlord. But in most cases, most of the single-family homes in this area, it’s normal to have all those covered by the tenant.
So, in this case, we put in zero, but make sure you’re getting this right. I mean, utility bills every single month can really start to add up. So, if you don’t know, look at other rentals in the market and see what is what is normal, right? Is it typically covered by the tenant or typically covered by the landlord? Because that can really make a difference. And you want your numbers to reflect that accurately. But in this case, zeros across the board.
[00:11:42] DB: Property management is the next line item here. Depending on what the local property managers charge, that rate can fluctuate, it could be 8%, 9%, 10% of the gross rents. It may be collected rents, it may be projected rents, or whatever the lease says the rent will be. It could be even higher, it could be even lower, depending on the types of things that property manager will do, depending on the number of properties that that property manager is managing for you. There’s different kind of area norms there. But 10% is kind of a nice number to pencil in here while you’re doing the rough math to get started to see if a property may be a good fit and worth further exploration. In this case, the $2,700 month rent then pulls down to $270 a month for property management.
[00:12:28] NH: For vacancy, the next one there, basically anytime the property is not generating income, it’s vacant, right? So, you’ve got, either no one paying or you’ve got no tenant in place at all. And so, you want to account for some of that in your expenses, so that if you have tenant turnover every year, or times where that property is not going rented, you’re basically paying yourself now to cover that time later. There’s lots of different ways to calculate this. Some people use 1/12, or covering one month’s rent over the course of a year. We put in 5% here, because for the area, typically vacancies are very short, especially when you’re using a property manager. So, 5% is a little bit more normal here, which again, 5% of that $2,700 comes out 235.
[00:13:06] DB: Repairs and capital expenditures are the next two lines, which we did another deep dive episode on back on episode 41. So, if you want to further explanation, I’d encourage you to check that one out. These two categories to repairs are some of those less predictable, lower costs things like a faucet that might start leaking out of nowhere and then needs to be replaced. The capital expenditures are more of those larger cost, more predictable things that generally have a lifespan to them. So, something like a roof or a furnace where you expect those things to last, I don’t know 20 years plus or minus, depending on the roof, depending on the furnace that was installed.
So, those items, different people will estimate in different ways, and there’s there’s probably a lot of art and a lot of argument, a lot of arm-wrestling over these kinds of numbers right here. Because when we talk about repairs, for these line items, Nate and I have been talking, we’ve heard people estimate anywhere between 5% and 15% of the gross rents for repairs, anywhere between 5% and 15% of the gross rents for capital expenditures. You could even look outside of that range too, depending on how conservative or how aggressive you’re being with your numbers.
Part of the problem of percentages or their percentages work and they fit really nicely in an Excel sheet is that the percentages may not tell the whole story of the actual condition of the property. So, if this house we were flipping through the photos, and the roof was already missing shingles and looked like it didn’t have a lot of lifespan left, you may be able to put $200 a month aside for three months and not even make a dent in what that roof will cost you in terms of a roof replacement. So, setting aside money every month needs to happen, and there’s a lot of dependencies on that. Again, we went way deeper into this back on episode 41. But other just general things to consider are the condition of the property, the size of the property.
For instance, if you have three bathrooms in a kitchen, that’s four faucets that may start dripping. Whereas if you have a two bed, one bath house, that’s two faucets that may start dripping, right? So, there’s more risk and more things that can go wrong, you could talk about the quality of all those fixtures. If that’s a really nice $400 faucet, that’s a big difference than the $29.99 cent faucet for the bathroom. Those kind of things at different price points all matter. That’s where a lot of people do still use those percentages. Just to keep things round and simple, we went with seven and a half percent for repairs, and seven and a half percent for capital expenditures that comes out to $203 a month for each of those line items.
[00:15:53] NH: The last thing on here is the HOA (Homeowner Association). Again, if there were an HOA or other fees, this is where that would show up. Again, in this particular neighborhood, no HOA fees, so that’s another zero.
[00:16:01] DB: It’s always possible that there are other fees that you need to consider. So, there may be things like a city compliance inspection that would have to happen every few years, or maybe some kind of annual registration fee with the city that may have to happen. Those generally don’t cost a ton, but they do add up over time. So, they are still things that you need to think about. So, on that HOA line, there could be other things as well that you want to plop in there.
[00:16:29] NH: So, obviously, those of you that are listening to this and don’t have the spreadsheet in front of you, we just threw a ton of numbers at you. So, to reorient you, we started off with $2,700 a month in income. That was our rent, right? When we factor in all the expenses that we listed, and we know we can argue about some of these numbers, or we could take things off the board, if it doesn’t make sense. But using the numbers that David and I just went through, we come out to a total of $2,567 in terms of our total expenses. So, $2,700 in, $2,567, every month going out, which results in a cash flow of $133 a month.
Now, again, what does that number mean? That is where we need to really dive in and understand what that cashflow is and understand what your goals are in terms of a good or a bad investment.
[00:17:15] DB: It’s also, I think, worth mentioning that the $133 a month, like when Nate and I have done this math on properties that we’re looking to buy, and then we go back and we look at what actually happened after we purchased it, it never comes out to $133 to the penny in any given month. Because a lot of these things are reserves like your vacancy reserve, your repair reserve, your capital expenditure reserve. On a month that you replace a garage roof, like that’s going to be a really bad month, because you’re just pulling out of those reserves. On a month when there are no repairs, there’s no vacancy, there’s nothing going on, that number is going to look really good. And then theoretically, you’re hopefully being disciplined enough to not pull all that money out. But to continue to build those reserves in a kind of responsible way, knowing that those particular, the capital expenditures, those predictable expenses will happen over time. So, $133, just kind of that predicted, if we take a whole bunch of months and average them together, this is what we would hope to see.
[00:18:13] NH: So again, to really evaluate what that means, though, in terms of is $133 a month good, we need to look at the loan and look at the upfront costs, because that’s how we’re determining the return on investment and the cash on cash return. So, if we assume a 25% down loan, like we said before, there’s other pieces that are going to be factored into that. It’s not just the down payment, but there’s other upfront costs.
[00:18:34] DB: Yeah, I would say due diligence is going to be one of those first upfront costs. And so, from a due diligence standpoint, I’m thinking about a home inspection. Some investors may not get a home inspection. If you just happen to be like a licensed home inspector or licensed builder on top of being a licensed pharmacist, cool, then you can do that. But you may not want to take that risk, if you are a pharmacist that doesn’t know how to evaluate all these things.
So, getting a home inspection can help to reduce that risk. If there are repairs that are noted, then that can be oftentimes negotiated through the purchase process. You may save yourself a lot of time, headache, grief there if you can have that home inspection done. Even if those things don’t get negotiated, another big piece of value in that home inspection is the home inspector may say like this roof probably has 5 to 10 years left. And then you can predict better with these capital expenditure line items. The home inspector may say that, all of the plumbing in the house, all the plumbing fixtures are pretty old. You may think that, well, it’s more likely that repairs are going to need to happen because every faucet in this house is 30 years old. So, you can tweak your numbers as well, once you’ve been through that home inspection process.
[00:19:48] NH: Obviously, the due diligence is kind of the upfront cost that you’d be having. But the other big ones that you’re going to see at the closing table are your down payment and then the closing costs of the loan. They’re going to be the biggest components of this. And so, again, if we’re assuming a 25% down, 30-year mortgage, we’re looking at about $66,250 in terms of your down payment, and then your closing costs are going to average anywhere from 2% to 3% of the total cost of that loan. So, we’ll assume 2% in this case, just $5,300. So, all together, those are your big upfront costs that you’re going to see.
[00:20:22] DB: Another in this case, smaller costs that we’re going to assume happen somewhere, even though this property was listed for rent the next day, right? There wasn’t a lot of time to do things. But my assessment, my expectation would be that there’s still some repairs that happen somewhere. Someone had to go in and change the locks. Someone had to go in and make sure the smoke detector batteries were all good. There have to be just those safety-oriented things that happen. So, we’ll also set $1,000 for repairs, maybe that’s high, maybe that’s low, but we’ll put that as a placeholder in the math. So, that helps us to figure out our out of pocket cash that is required to purchase this house. That’s the due diligence, the closing costs, the down payment, and the repairs. So, if you put all of that together, this property looks at $73,050 as total cash invested. That then gives you a baseline for figuring out that cash flow piece, right?
[00:21:19] NH: So, if we go back to the cash flow, $133 a month. If we assume that’s given out over the course of an entire year, you’re getting $1,596 in your pocket every single year. Now, again, who wouldn’t want an extra 1,600 bucks? That’s great. But it cost you $73,000 to get that $1,600 a month. So, we can determine is that a good investment or not? Or is that a good return by calculating what’s called cash on cash return. Very simply, you take that yearly return of $1,596, divide it by how much it took to get that return, $73,000. And you get about 2.18%, which by some estimates is pretty low. Again, if you compare that to something like the stock market, which on average is returning between 6% and 8% cash on cash in that case, you’re really losing. You’re spending a lot more time and effort, a lot more risk to get a much smaller return.
So, that’s one way to evaluate a property and look at it. Again, we know there’s other ways to run these numbers. But if we’re looking at it from that strict standpoint, 2.1% is roughly our return on investment here in terms of our cash on cash.
[00:22:27] DB: Yeah, we know there’s also some noise and some risk in all of that, because these are definitely estimates. It could be that maybe we’re overestimating for capital expenditures, and we can take that down, or maybe we’re under estimating for repairs and vacancy. Like if I know that it would be pretty expensive to paint a 2,600 square foot house, if a tenant comes in there and Sharpie markers over the walls or something like that. If someone were to just trash this place, it could be pricey to clean that back up when it’s a larger property like that. So, these numbers are still very much a prediction, and there’s a lot of risk in there. I wouldn’t want to take 2.18% and guarantee that by any means. But this is helpful to get in the ballpark. But thinking through that risk, we were brainstorming before the call, of reasons why this still – someone clearly bought this as an investment. What would reasons be why someone would buy this as an investment?
[00:23:24] NH: Yeah. So, I think the first thing to look at is that cashflow might not be everything, right? Maybe there’s other factors that are affecting the overarching ROI. So, for example, maybe you’re convinced that this area is set to appreciate both in terms of the rents and the terms of the property value. And so maybe that ROI should look into things like property appreciation.
Now, again, that’s really difficult to estimate. But if you are really bullish on that particular market, maybe that’s this investor’s play. So, if you plan to sell that house in four years, and you’re convinced you’re going to see a 20% increase in property values across the next four years, that’s 5% appreciation per year. Again, totally a gamble, but not impossible. If we expect that 20% of that $265,000 or roughly $53,000 of increased value, now you’re talking about spending that money to get a much better return on investment than that 2.1% we would have estimated.
[00:24:17] DB: Yeah, another factor that we didn’t necessarily put into the math here, but it’s worth considering is the amount that the mortgage is paid down on a monthly basis. If you go and you Google for a mortgage calculator with an amortization calculator in there, you can look at how much the tenant would be paying down every month by paying the rent and then you paying the mortgage. Essentially, you’re looking at 260, 270 something like that dollars a month, that would be paid down on that mortgage. So, over a several year period, that can start to add up pretty quickly to several thousand dollars, tens of thousands of dollars depending on how long you were to hold that house, which is also one of the reasons why some people prefer a 15-year mortgage where the payment is higher, but you pay the property down quickly.
So, if you’re not a fan of having a lot of debt, and you want to pay that off quickly, that could even be a strategy where you would sacrifice cash flow in the short term to have a paid off property in the long term. Generally, getting a lower mortgage rate on a 15-year versus a 30-year.
[00:25:22] NH: The last thing we talked about was if you’re really optimistic that rent increases are going to happen over time, and you’re thinking like I’m buying in right now, it’s going to be a little bit low. But over the course of the next couple of years, I’ll be able to raise that rent, then your overall cash on cash return over the long term is going to be much better than it is just in the year one. So, for example, if that rent jumps from $2,700 to $3,400, over the next five years, now all of a sudden, you’re talking about a cash on cash return of over 10%, once you get to that fifth year. So, if you add in things like mortgage appreciation, or mortgage pay down, the appreciation of the property itself, other benefits, if you take on perhaps the property management yourself for a while, that rate of return starts to look very different than our original estimate would have assumed.
[00:26:03] DB: Yeah, and certainly if your reason for purchasing a property is that you expect this, like drastic appreciation we’ve seen in the recent years, as far as both rent and property appreciation. I don’t know, if everyone’s betting on that right now. I know I’m not necessarily taking the stance that we’re going to see this runaway appreciation for years and years and years here. But different people have different beliefs. So, as we’re trying to figure out why someone may have made a certain decision, that could be one driving reason, among many others.
[00:26:34] NH: Like we said before, too, if you think a certain area, and you really believe that long term, it’s going to be a popular or well appreciated area, and you’re just looking for something that is pretty neutral in terms of cash flow, it doesn’t cost you any money to have it every single month. But at the end of your mortgage term, you’re going to have a paid off property. That’s not a bad long-term investment strategy. I mean, if you really think this area is going to go up in value over the 30 years, this is like putting money into a 401k. It’s just a smaller return at the beginning and hope for a bigger return at the back end.
[00:27:04] DB: I think one of the things that I hear people frequently just chew on when they look at an Excel sheet like this, or some kind of calculator is that they want there to be like this red, yellow, green light at the end of it of like, “This is a good deal. This is a bad deal. This is an okay deal.” And that’s really just such a subjective thing. I think as we go through all these different criteria that different people may be looking for different things, they may have different restrictions. Maybe they want to own a rental property that they could walk to from their house. So, they want to be really close to be able to keep an eye on it all the time, and that restricts area. Or it could be a thousand different things, why this could be a good deal for one person and a bad deal for another person.
So, a lot of what’s behind the calculator here is also getting comfortable with how you would define a deal and what would make a property attractive to you for an investment. For me personally, I’ve had real estate investing mentors of mine helped me to work through that what I’m looking for, and again, safety oriented, risk averse pharmacist. I like having a decent amount of cash flow, because if my estimates are off, I don’t want to be writing a check every month to pay for a property that’s losing me money. I would rather err on the side of having more cash flow, and that just helps me to sleep at night. So again, different people are going to have their own priorities and preferences when it comes to identifying what’s a “good deal”.
[00:28:33] NH: I’m very similar dude. I think we’ve talked about this in the past. But I really want cashflow to be king, and appreciation is all gravy, right? I’m never going to assume appreciation is going to go well. It should over the long term, but I don’t want that to be the thing that makes or breaks the deal. So, I really target cash flow, especially since I’m pretty early in my acquisition phase here of buying properties. I want those properties to be covering themselves and putting money in my pocket.
Ideally, again right now, and my numbers change every time I look at them. But like right now today, I’m targeting 12% cash on cash return. It doesn’t have to get that. But it has to be possible to get that for me to be interested in the property. It’s where I’m at today. But again, that’s a very personal decision. Some people are going to be at 5% and super happy and other people are going to be at 30% and really trying to find that. So, it’s very unique to you as an individual and what your investment goals are.
[00:29:25] DB: Yeah, and I have talked with several others that would argue hard to the other side, that like appreciation is where money is made and cash flow is kind of your defense. I’ve heard that argument as well. Appreciation over time can really help especially if you look at some of the markets that have appreciated in the last 30 years and what a house could have been bought for, versus what it would sell for today. Some people are doing very well with that.
So, I don’t mean to say that appreciation isn’t ever a smart play, but it’s kind of figuring out what is comfortable to you. And as you figure that out, just inherent behind that is that you need to be able to do the math so that you can then have confidence that yes, this property does meet my goals, I can look at these numbers, and I can be confident that that’s right for me.
[00:30:12] NH: Again, not sitting here trying to tell you what’s a good or a bad investment. Hopefully, this gives you a way to start analyzing and looking at deals on your own. If you missed it earlier, we are offering up this spreadsheet that David and I just walked through so that you can run your own deal analysis on your own properties. If you head over to yourfinancialpharmacist.com/analysis, you can download a free copy of that spreadsheet. Again, all these numbers will be pre populated, and you can mess with it as much as you want. Again, just a great way for you to start running deal analysis and start seeing what works for you.
So, I finally want to give a quick shout out to the YFPREI Facebook group. If you are looking to run your own numbers past a community of likeminded pharmacists, it’s an awesome place to get together. We love when people jump into the chat and say, “Hey, looking at this deal, what do you guys think?” So, if you’ve not already joined that, or if you’re a member today and haven’t posted anything, please jump in, post it up, let us know what you’re working on, what your what areas you’re investing in, what kind of deals you’re looking, what things are seeing in your market. I’d love to say hello back to you guys. So, if you haven’t joined that, look for Your Financial Pharmacist REI Facebook group and make sure to join.
[00:31:16] DB: Yeah, there can definitely be value in jumping in and having other people look at this, getting other eyes on what you’re doing. There’s just so much value in that community and so much confidence that can be built that way. So definitely encouragement, please jump into the Facebook group and we hope to review deals with you there soon.
[00:31:33] NH: Thanks for joining us, guys.
[END OF INTERVIEW]
[00:31:35] ANNOUNCER: Thanks for listening to the YFP Real Estate Investing Podcast. If you like what you heard on today’s show, please leave us a review and subscribe to the show so you never miss an episode. If you have a question, know someone that would make a good guest or want to connect with Nate or David, head on over to yfprealestate.com and join the growing YFP Real Estate Investing Facebook group.
As we conclude this week’s episode of the YFP Real Estate Investing Podcast, an important reminder that the content in this podcast is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information of the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.
Furthermore, the information contained in our archived newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analysis expressed herein are solely those of your financial pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.
Thank you for your support of the YFP Real Estate Investing Podcast. Have a great rest of your week.
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