#20 – How to Analyze a Rental Property w/ a Twist!
Episode notes
Join us for an episode on how to analyze a rental property –spreadsheet nerds – this one’s for you!
Transcript
Auto-generated transcriptGenerated automatically from the audio and formatted for reading. Nothing has been reworded, so expect the odd mis-hearing, and no speaker names.
Now I thought it'd be really cool to give some some like AI focus for this one. So I have a confession to make. What's going on everybody? Welcome back to another episode of Curiosity Class. This is going to be a follow on episode to the episode I did a couple weeks ago about how to invest in real estate remotely. And So what I thought would be cool today is to go through an example of how to find a deal and how to evaluate a deal to see if it's something that you want to pursue. So what I'm going to be doing today is, is walking through how to step by step, find a deal, analyze a deal and, and try to feel comfortable with pursuing and putting in an offer.
So what we're going to do is I'm going to share, we're going to pick a market and we're going to go through and literally from Google, we're going to see OK, properties in that area go through, you know, pick one and then analyze 1 and I'll show you how to analyze it. So let's get started. I'm super excited to to dive in. All right, so let's say we've identified the market as Saint Louis. So I'm literally going to type multi family Properties for Sale in St. Louis, MO. And this is just a personal preference. I tend to use realtor because I think for some reason it's just easier for me to like they do a better job of of showing multi family like duplexes and triplexes and stuff.
So I'm just going to go through and scroll to 1. I don't want to get one that's like the $1.00 one. I think that's probably like that. Looks like a big project, but let's choose one. Let's look at this one. This looks kind of cool. So it's listed for $89,000, about $90,000 sometimes on Realtor. It'll show you what they think it's going to rent for. So that's what I'm looking for in the property details. So it doesn't show what it's rented for. That's OK, We'll go look at another one. Let's try this one going through. No, let's try this one. I think this was the one I pulled up earlier that had the rents listed.
So yeah, this does this does show us. So this is kind of interesting. So this is a good baseline to use. So it could easily rent for 8:50 a month and it's a duplex. So what is that about $1700 a month in rent. So, OK, cool. And again, this is just very quick back of the napkin way to to calculate. So it's listed for 170, it should rent for about 1700. So immediately we know that this hits the the 1% rule, which if you remember from last time is you take the monthly rent divided by the purchase price. So in this case, $1700 / 170,000 dollars is the purchase price and that equals 1%.
It's just a way to evaluate very quickly on these less expensive properties. Like OK, back of the napkin, this should cash flow. But in order to see if it really cash flows, we need to analyze it. So that's what I want to walk through now. So in order to analyze it, best way to do is use a spreadsheet. And this is the one that that I use and I'll share a little bit more about how I made this later. But so the purchase price is 170, we're going to put 20% down. Presumably this is being filmed in October of 2025. S interest rates being about 7% is fairly accurate and honestly might even be a little low.
So let's do 7.5 amortized over 30 years. Our monthly rental income we estimated at 1700 for both sides. And so this is where you're going to get a little bit more creative. So you're operating expenses on a monthly basis. Your property tax, this is going to really vary depending on the property. So maybe it'll tell us actually what property taxes are. That's the other cool thing about Realtor is that it shows you what your total payment is like this says includes principal and interest taxes and insurance, but it doesn't give us a breakdown actually of what that is in total, which is kind of annoying.
But we know that our total payment is going to be about 1050 a month. So that's good to know. Annual tax amount 1712. So if we do 1712 divided by well, 12, right, that'll give us our property tax on a monthly basis, insurance $150.00. That's actually fairly reasonable to assume for properties depending on the size and obviously it might range, but 150 bucks a month is fairly realistic because what is that per on an annual basis that is 1800 bucks. Yeah, that's, that's fairly reasonable. It doesn't have an HOA maintenance reserve. Usually I estimate this as a percentage of rent.
So I normally say like, OK, I'm going to take 10% of rents per month and put it aside as a maintenance reserve. And in this case, that would be $170. So at $200, this is a little bit more. And property management, again is a percentage of rent. So good rule of thumb is to use 10% of your rental income as property management. So we'll do that here and we can make that dynamic. So equals that times .1. Whoops, .1 huh? For some reason I can't type a period, but that's OK. Vacancy reserve, this is going to be 5%. So basically what that's saying is OK, hopefully your property is filled for the entire time that you own it and you never have a vacancy.
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But that's not realistic unfortunately. So what this does is it says, OK, what percentage of the time are you going to have one or both units vacant? And so rule of thumb here, it really depends. 5% is probably a little low. I like to go a little bit higher, so estimated at 10%. And then this is also going to ask us for closing costs. So 3% is just like, hey, you bought the property, you have to pay for, you know, title work to be done and inspection to be done. So you're going to have other costs associated with buying this property. So now we go over to our calculator tab and this is going to tell us some more information.
So the green is what we've already inputted. So we don't need to change these. And then the black is going to show us what our what our outputs are. So that's actually doing the calculation for us. So based on this, our loan amount is going to be $136,000 and based on that our just our mortgage payment is going to be 950 bucks a month. And so if we remember, if we go back to to realtor, it showed us what our mortgage was going to be. And so it's a good gut check to be like, OK, are we within the, the, the right ballpark? So this interest rate is lower.
If we use 7.5 like we did in our calculator, it goes to 1165 a month, right? And this is assuming a 20% down payment, which is the same as we have. So this is showing 1165, our taxes and insurance are probably a little higher, but so 950 for just the principal and interest. And if you remember mortgages made-up of PITI, right? So principal, interest, taxes and insurance all go into your monthly payment. So the 950 is just your principal and interest, right? We still need to add back in which we'll do down here your taxes and insurance. So that was a ramble that you didn't understand.
Don't worry, it's not important to to this topic. So this is our mortgage. Now we're going to go down to our income and we've it's already calculated this for us, so 1700 minus our 170 for vacancy. So our effective monthly revenue, our monthly income is going to be $15130. And then these are all the same expenses from before. And so if we add in all of these operating expenses accepted that it's thinking property management is $1700, which it's not. So that's a mistake. Property management is going to be $170, not $1700. So now if we go back, that should be corrected.
OK, good. So our total operating expenses here, here $832.00 and real estate does something a little interesting because when you're calculating for something called net operating income, it's your total, your effective rental income minus your operating expenses. That gives you your net operating income, but that doesn't include your mortgage payment, which is really confusing to a lot of new investors and something to, to really like pay attention to because if you look at this and you said, ah, my, my net operating income, my NOI is almost $700.00.
That's great. But we're not accounting for the mortgage yet. So once we take that into account, we say, OK, great, our net operating income is 700 bucks, but then we make our mortgage payment and that mortgage payment of 950 actually brings us into negative cash flow territory. So that's really important to know. And then if we look on the summary sheet here, it shows us kind of just a total breakdown of that entire process that we just walked through and it gives us OK, negative cash flow. So that was obviously a super quick way of running through a property.
But I just wanted to give you a quick rundown of of how you do actually analyze a property. So the best thing to do is to make a spreadsheet, you know, like this one to be able to analyze this. Now, I thought it'd be really cool to give some some like AI focus for this one. So I have a confession to make. I actually didn't make this spreadsheet and this the following affiliation is is not an affiliation. It's not a sponsor of the show. This is just a a company that I heard about on the podcast I was listening to earlier this week and I thought it'd be cool to to check out.
So this is called try shortcut dot AI. So I literally just made a free trial and what it is this is try shortcut dot AI and it's crazy. I wanted to see if it would do what I wanted to do and it it did and then some. So you open up, try shortcut dot AI and it asks you for a prompt. So this is the prompt that I gave it. I said, can you build me a model that analyzes rental properties to see if they will cash flow or not? It should be able to calculate all costs as well as have a dynamic mortgage payment based on down payments and interest rates. It literally that was the only, that was the only information I gave it and it made this entire thing.
So I mean, the only, the only error was that I couldn't type the period for the property management column. So I mean, that's pretty crazy, especially for a first pass. Like that was literally all the information I gave it and it generated this, it formatted it, it bolded things, it made multiple sheets. So I'm pretty blown away by that. Like that was not expected and super cool. And again, that was like a totally random company had heard about. There's no affiliate, no affiliation, I don't get paid or anything like that for promoting them. I just think it's really interesting and I like playing with these AI tools because I think that every week they get crazier and crazier.
So this is how to evaluate a rental property in 10 minutes or less. So hopefully this was helpful if you want to see more of this stuff. Let me know if you have any questions about this stuff. Let me know if you want to get in touch and chat about real estate, ask about deals you're looking at. You know why I pick some of the numbers that I picked. If you think that I did something wrong, feel free to let me know. And as always, thank you for listening to and sharing your time with me and looking forward to seeing everybody next time. And bye everybody.