I wrote a post about 5 Mistakes When Buying Your First Property that I personally made to give you insight into mistakes to avoid. The first area I messed up was in the amount of time it took me to secure my first deal, the second was what type of property to invest, the third was Too Many Credit Checks The below goes deeper into my 4th mistake Knowing Your Numbers.
Being able to analyze a deal to understand what you can afford to pay, how much you need to put down, and what the return on your investment will look like are all very important. I struggled to determine those numbers and had a very wide range for what good vs. bad looked like on my first investment property. I didn’t have a great system for calculating my numbers and relied a lot on whatever free rental property calculators I could find on the internet and my own guesses. I could not tell you at the time at what return I bought the property and what I was able to improve it to through bringing in new tenants.
If you are going to be a serious real estate investor or even a dabbler with some success it is vital you really understand your numbers. Now there are a ton of numbers you could track from Cap Rate to Internal Rate of Return to Cash-on-Cash Return. It can get pretty confusing and one number may look good while another may not.
The key is to go back to the “why” you are investing in real estate in the first place. Is it for cash flow? Appreciation? A store of wealth? Understanding that why you are investing is really important because investing for appreciation vs cash flow are typically different strategies.
Now that you have your why you are investing sorted out (for me it was cashflow) you can determine what numbers you will look at to evaluate deals. You can use one of the many free investment calculators on the internet. It is important you use the same calculator to compare all of your potential deals to ensure you have a like comparison.
Once you have your investment strategy, the numbers that matter to your strategy, and your calculator it is time to analyze lots of deals. This can be time-consuming so play around with some of the inputs on the same deal to help you learn quicker. For example, I would play around with my rental income numbers to see where a property was currently, a conservative average rent, and then a top of the market rent. I could see the impact this would have on my investment and help me understand how a few hundred dollar difference in monthly rental income could make or break a deal. I also played around with my interest rate, down payment amount, and costs. All of these numbers have a huge impact on what makes a good deal or not. Learn by looking at the same deal with different inputs.
I made the mistake of not really knowing my numbers early on when analyzing deals and it really slowed me down. I missed some good deals and almost bought some bad ones. Now that I’ve made a purchase, sourced and screened tenants, and managed a property I have a much better understanding of how important knowing your numbers really is from the outset.
I was lucky enough to really understand that the current rent rates were well below market rate and because of changing that one input I went from a breakeven cash flow deal to put a few hundred bucks in my pocket after all expenses were calculated. Oh, and my tenants pay my mortgage each month!