Shane Willis: All right, so I wanted to shoot this quick video because I have people wanting me to analyze properties all the time. They’ve seen some of my videos talking about cash flow is king, and you should not invest in just real estate for appreciation only, it’s a bonus. How do you analyze cash flow? And how do you compare a real estate deal to a let’s say a CD down at the bank because you see the interest that’s the CD’s paying, right, or you see a mutual funds claim, or you see a bond. You see what they claim. They’re 2%, 1%. Savings accounts are .000002%. I don’t quite know why we use savings accounts anymore. Anyways, how do you compare a real estate deal to that?
Shane Willis: I wanted to bring this screen up. I’m gonna share our screen. I was actually analyzing this deal for a client of mine not too long ago. This is how I do it. I’m gonna walk through a little bit just so I can give you guys an idea of what you should be looking at. The purchase price on this property is $200,000. Everything we do when we deal with rental properties when we deal in real estate is going to be annual numbers. It’s not gonna be monthly numbers. It’s gonna be annual numbers. This one makes $1500 a month, so that’s $18,000 a year. Our taxes, this little formula actually bills out for me, so I can put in the monthly taxes, and it takes it to an annual expenses as you can see here, so my taxes, my insurance.
Shane Willis: HOA on this particular property is not much. It’s only $300 bucks a year. We’re getting the property professionally managed, so there’s the 10% there. The utilities and trash are going to be on the tenant. There is no lawn service on this one. Maintenance, I put about $600 a year. It’s a fairly newer property, so we shouldn’t have too much maintenance, but you have to do that to buy properties. And then you’ve got your vacancy reserve, which I put at about half of one month’s rent. My annual expenses on that are $6,648. Gross rent, $18 grand. Annual expenses $6,600. That made my net operating income as $11,352. If I just paid cash for the property then my CAP rate, capitalization rate, would be 5.68%. I would make a little over 5 1/2% on the property if I just paid cash for it, but most of us don’t.
Shane Willis: One of the biggest reasons we like real estate is because we can use other people’s money. We need to look at our debt service assumptions. In this particular one we said hey, we’re gonna do a 30 year note. We’re gonna have the 5% interest rate. We’re gonna put 20% down, okay. That means now my debt service payment is $10,307. Now if you remember my net operating income is only $11,352. This is without any debt, so pay attention to that. This is without any debt, so then you take your net operating income subtract out your debt services, I make $1,000 a year. But I put $43,000 down, which means cash on cash return for this deal is under 2 1/2%.
Shane Willis: As soon as I analyzed this deal for this client I told him he’s not allowed to buy it. That’s not a high enough number. I like to see those numbers really close to double digits, maybe even over double digits. To be able to put $43,000, and literally I’m putting $43,000 down, and I’ll make $1,000 a year. If we stay fully rented we’re gonna make a $1,000 a year. Now I do have a vacancy that may make $1,600 a year. I don’t want to put $43,000 to make $100 bucks. I just don’t. If I was putting a lot less down, or if this was a lot less expensive that would make more sense. I’ve seen this cash on cash return at 19, and 20%. Those deals gets gobbled up very quickly.
Shane Willis: But I wanted to show you guys this because everybody asks me, you always say let the numbers do the advice for you. Let the numbers do the talking, the decision, well this is how. Now I can compare this to a CD. And if I got a CD that’s paying me 3%, or a bond that’s paying me 3% it’s better than this deal. Again, appreciation is a bonus, so forget that. Let’s just look at these numbers. I hope that helps a little.