How Do I Crunch The Numbers On A Real Estate Deal?

How Do I Crunch The Numbers On A Real Estate Deal?


Welcome back my friend. Kris Krohn here.
Today, we are talking about “How do you crunch numbers on a deal?” Like people ask
me all the time, “Kris, how do I know if this is a good deal, right? If it’s good,
I’m gonna make a lot of money. If it’s bad, I could lose my shirt. How do I keep
that from happening? I brought the expert in, the big guns. Tyler Bennett is here with me today to
explain performance. We’re going to talk about crunching numbers. Dude, thanks for
being here. -Yeah, you bet. Things having me, Kris. -So, dude. Listen. I know that you’ve
come prepared today to share with us some of your performance. But I’m not
going to lie. They freaking look scary at first. I mean, come here. Look at this. Do
you see all the numbers on that? It can’t even all fit on one page. So, someone
looks at that and they’re like, “Oh, no. I have to be a scientist and a PhD nerd to
like figure out what this thing is telling me.” Reality is I
actually make all my decisions based on one number. And we’re going to give that to
you at the end of this video. But let’s pause and make this real first. Like, what
are the big things that people need to look at when actually crunching the
numbers to actually know if a deal is good or bad. -Yep. -So, you’ve got a few key
numbers you want to look at. Purchase price, obviously. Location, what’s the
address, neighborhood; all of those things but
rents? So, what’s coming in? What’s going out? So, rents, expenses and then what’s
the end number? So, what’s the net cash flow from that number and all of that
wraps into a return on your investment. -It sounds to me almost just like a
business, right? -Yeah. -I mean like, I start a business it has a value. I hope that I
build it up to a certain value. And when I sell it, I can make a chunk of money.
But along the way, I’ve got money coming in, I’ve got money going out. What
do I keep along the way? -Exactly. -And real estate is really just
the same. -Yeah. What do you have available for operating capital, right? That’s that
cash flow to service the debt that you have on it. -And do you need to know like
trigonometry and geometry and calculus to be able to do this? -No.
-Dude, this is like fifth grade math, right? -Yeah.
So, it looks like a lot of numbers but frankly, a lot of those extra numbers
that you see in these documents are basically to say “Have we calculated
every last penny on things that are important?” And we’re going to share with you
how to make this stupid simple. But really it just comes down to these big
picture items. -Yeah. And a lot of people go wrong or you go on Google and you
look up all these different pro formas. They’re all so different because people
one try to make it more attractive than they really need to be. Really
should be. And then it comes down to the assumptions, it’s what’s behind these
numbers. -Yes. -What are they assuming the vacancy rate are. -Yes. -What are they assuming
the interest rate is on the mortgage or the
down payment percentage or the property management fees? Where are the growth. All
these different numbers. We could have the same house and we can look at 10
different pro formas. But if the assumptions are different. -Dude, check this
out. I want you to get this. What Tyler is talking about is this confirmation bias.
If you hate real estate then when you have numbers presented, you’re going to
believe in the lowest and worse number. If you are positive and keen on real
estate, you’re going to want to be aggressive and look at the biggest
number. And so, it’s interesting, right? I mean, you look at the market like, “Oh, yeah.
I think the market is going to go like 20% this year. Just imagine if it
happened for 5 years. I make 100% of my money.” Like that’s what an
over excitable person does. And I can tell you, in my life, I’m a super positive
human being but when it comes to crunching numbers, I actually kind of put
on my pessimistic skeptic app that says, “Give me reality.” I don’t want to be
biased by my positivity and I also don’t want it to be skewed by unnecessary
negativity. I just want to know what is real. -Yeah. Zero emotions. -Yep. -Right? Remove
all the emotions. What are the real numbers and what’s a realistic
expectation for this house, then let’s go sell based off a realistic expectations.
Let’s not go and try to turn this house that we shouldn’t be selling and make
it look so much better than it’s really supposed to look. -So, listen. In a moment,
we’re going to put a Performa on a live actual deal going down right now as we
speak. But before I do, like let’s just bring this point home. Number 1, what is
a home worth it? Home is only worth what someone’s willing to pay. So, if I could
buy a house for 140 and I’m like, “Oh, I did a comparable market
analysis through the realtor. And I think it’s worth 160. I have $20,000
of equity.” You should scrutinize that number and say, “How real is that CMA?”
Is it really based on enough comps (comparables, right?) in close enough
proximity. Now, by the way, if you’re watching this and you’re like, “Oh, you guys
are hurting my brain with all this real estate lingo!” Subscribe, my friend.
Subscribe and always check out the links below. Get my books. I provide all these
free resources because you need to become a financial ninja. If you expect
to make a million dollars or 10 million dollars in real estate, then you need to
understand some of these basics. So, stick with it. Bottom line though is I don’t
want an inflated number that make me feel good and same thing on like
rents. Go to a property manager and find out, “Wow! These 20 homes in this area all
rent for 1300 a month.” Let’s not pretend it’s going to be 1400. -Don’t ask the
person trying to sell you the property what it’s going to rent for. -Oh, they’re
going to like… -Ask the person you could hold accountable what it’s going to rent. -Well,
yeah. And so, that’s kind of an interesting game because you’ve got
Realtors. You’ve got loan officers. What is a loan officer want? They want to ride
alone. They’re financially incentivized right
alone. So, if you were to ask them like “Hey, do you think this is a good deal?
What are they going to say?” -“Oh, yeah. That’s great!” -Whatever we’ll get the deal done,
you ask a realtor if it’s a good deal. And listen, I know I’m not saying these
people are bad. It’s just at the end of the day, you got to understand that a lot
of individuals that are incentivized by what drives and motivates them. This
house is for you, it’s not for them. I’m going to do whatever it takes to actually
get you that house. So, we’ve got to find a way to get non-biased information. By
the way, at the end of this video, you have an opportunity to click the link
and get this book for free. Do you know what it teaches you how to do? How to
evaluate properties. It’ll actually show you how to do a CMA –comparable market
analysis, know what something is worth. And it’ll show you how to be as
objective as possible and remove your emotional bias so that you can look at
it without emotion like Tyler said. So, that’s a gift.
Listen, cover shipping and I send this in the mail to you. It’s a free gift. It’s a
tool so that you can crush it. But back to the story, right? Like, let’s look at an
actual deal. And now I think people are prepared to not get so scared by what
they’re about to see because at first, it looks like a lot of numbers. But I want
you to break this down. -Okay. So, first we start with the address, right? Where is it…
Where’s this house located? This one happens to be in the Orlando market in
Poinciana Florida. -By the way, the person that buys this house, did they live in
Orlando? -No. -They most likely live where? -Not
Florida. -Not Florida. Yeah. So, this is an out-of-state purchase because Florida is
such a hot market. -Yeah. What else are you looking at here? -Okay. Let’s just look at
the house Year Built. So, Year Built, square-foot, bedroom, bathroom. Of course,
condition goes into that. We don’t necessarily see condition on a
spreadsheet or a pro-forma. But it’s important to
know what is the condition of this house because that’s one of the assumptions
that’s behind the scenes when we’re forecasting ongoing maintenance repairs
or or something we have to do to get it rent ready. Which all those numbers are
in here on our proforma. -Let’s break those down. Because listen… If you’re watching
this, I want you to know that all of the information we’re sharing with you, you
want to have a comfort zone with all of it. Because if you have all of this
information and it’s accurate and unbiased, then you can make a decision
based on the one number I promise to show you at this end of this video. Not
only do you have the book is a free bonus, but I’m going to show you the
number that I use to determine whether this is a, “Yes, pull the trigger I’m
buying this.” Or “Heck, no. I am absolutely not going to do it.”
-Okay. Purchase price. What can we buy it for? Down payment, how much are we putting
down? Let’s assume that 20% down payment, What are the estimated closing costs for
the mortgage including all the prepaid items everything that goes into getting
that. Rehab expenses. So, what is it going to take to have this property rent ready?
-Dude, check this out. On the outside, this looks like a really pretty house.
But what we know from the property management rehab report is that
$5,500 is probably going to be carpet and paint and some light updating. -Yeah.
-And hopefully because those items are needed, we’re getting the house for a
better price. Because that might turn off somebody’s binding as a primary
residence. -100%. -And we can go do that for cheaper than probably
anybody else can, okay? Acquisition fees. So, this is the fee that
we charge in order to use the system to buy the houses. All these experts out
there that are researching, finding the deal, managing the rehab teams, processes,
everything goes into that. -So, we get this 51,495. -So,
that’s basically the all-in like… -Yes. -$5,100 should basically say
“Everything’s covered” -Buy the asset, stabilize the asset, now we’re in cruise
control. -And now, you’re going to need to know that because if you know you’re
all-in number, you now can calculate. “Oh, every year that property is going to
give me some money. And I want to know how much is it giving me. It’s a
percentage of what I put in.” So, it’s called a cash on cash return which
you’ll see in a minute. Which is I put all this out, now what are you going to give
me. And in the long haul, what are you going to give me? -Yep. So, let’s look at now
what’s coming in, okay? We know 51,000 dollars going out.
Monthly rent 1,495, okay? Principal and interest is $762. We put 20% down, we
finance the 80%. That’s the principal and interest. We know the monthly taxes. 233.
Insurance 67. So, 1,062 is the monthly payment I’m making to finance
his property and pay the taxes in issue. -So, basically have almost 1500 coming in
and I have 1,062 going out. That looks like there’s like 442 bucks or $430 left over every
single month. -Correct. -Which is awesome by the way. -Yes. -But it’s important to
understand what happens with that 430. Well, there’s a few things we have
to pay with that. One is a property manager. -Yes. -So, over here in these
assumptions, we know that the property manager for this particular house is 6% which is below market rate, it’s good. -Pause. -Yeah. -You guys need to
understand this. Like property managers charge 10%. When Tyler says 6%, that’s based on a relationship where we’re doing hundreds of properties
with this team. And as a result, they give us something that nobody else does. By
the way, in real estate, you win with volume and if you guys get that. At the
end of this video, some of you like have just found like the turnkey solution for
doing all your investing needs is we represent volume and bulk. And that’s
important to note. -Yeah. -And you’ll see on it other
examples, it’s anywhere from 6 to 10 percent depend on the market, the
occasion and the property managers. This particular one is awesome. You have all
these other assumptions. Down payment, we talked about closing costs, interest rate
for a mortgage. Typically our clients are getting slightly better than this. Again,
we want to err on being conservative. Vacancy repairs. So, this is important.
We have 8% in there but we have the ability to track. We know
exactly how many of our 12-month leases renewed last year. And the ones that
didn’t, we know how many days on market it was. We know how much ongoing
maintenance is happening. And we have the ability to look at actuals instead of
just kind of… -Picked out the air. -So, we’re saying, “You’ve got allocate 8%
of that 14.95. Every single month towards future repairs and maintenance.” -Yeah. -And
then we have these appreciation numbers in here. So, we’re saying for the next 2
years, we anticipate this house to go up 8%.
Then for the years 3 through 5, 6%, after 6 –Years 6, 3%. -But how does this compare to the actual reports like we pay gobs of money
to the experts that are analyzing markets nationwide. Where’s this number
in relation to their prediction? -So, those guys typically project higher than what
we’re showing here. -Yeah. -And then we also go back and we review our actuals for
our actual product because the Orlando market could appreciate 7%
but our product could appreciate 9% or vice-versa, right? So, we want
to understand our product inside of the market as well. You know, last year for
example in 2019, we saw about a 9% increase in appreciation. -Now,
check it out. -So, we exceeded what we thought. -Right now, until now, the first top half,
this would all be kind of common sense numbers. Like, this is the information you
need if you want to crunch the numbers and know what you’ve got on a deal. We’re
not going to go into this. Below, you see things like, “Well, what does gross rent
looks like year 1 through year 10. Taxes, insurance, HOA, vacancies, repairs.
But all of those the numbers are substantiated. The number that I want to
get to today is that if you have all of your numbers itemized out, what you can
do is come to this box right here. And Tyler, go ahead and just explain what
this ROI means. So, cash on cash return on investment. It’s very simple. It’s what’s
the net net cash flow that I got for year one divide that into my total
outlay. So, the $51,000. What percentage is that. Our five-year
average is 7.63%. -Now, by the way, that is an awesome cash
on cash. Remember that 401Ks and IRAs are often doing on average, 4 or 5
percent. This is 7.6% and it’s in the form of money as in like
you can eat it. You can go spend it. I can go buy something. I go to the movies. -Yeah.
-That and if you look at over year 7 and 10, that number only gets bigger and
bigger. -Correct. And then you add on the principal reduction. -Every
payment… -Every payment, you’re paying down. Yeah, I call it deferred cash flow.
Because it’s your money. You’re guaranteed to get it back. When you sell
that house, you’re going to owe less than when you started.
And so, that number is close to 12% 11.68%
goes to 13, 15, almost 16 percent on the 10-year
average. -Now, this is where it gets crazy though. The reason why people get into
real estate is because you want to own a hard asset. You want it to pay you every
single month ideally. You want it to give you tax benefits. And you want it to
increase in value. That’s called appreciation. And in a market like this
out of the top 324 markets, this is the number one
market. And with that 8%, what that translates to is what in the 5 year
ROI. -So, this says, if you were to sell this year 5 and it appreciated at
that level that we projected and there’s closing costs to sell a house and it’s a
realistic assumption, that your annualized return would be thirty one
31.32%. -So, by the way, that’s over 5 years. So, 31 plus 31
plus 31 plus 31 plus 31. That’s 155%. So, that’s
averaging 31%. No bank accounts doing that. No 401K is doing that. No IRA
is doing that. The stock market isn’t doing that. And we get real estate to see
this way whether it’s pre 2008, whether it’s during the Great Recession of post
2008 to 2012 or whether it’s the economy right now that we’re doing. So, I
mean bottom line, we crunch the numbers. And I told you at the end of this video
that I would tell you how I make my decisions. And I’m going to tell you right
now, all of that math factors into this number right here. If this number is
greater than 25%, then I will buy it every single time. My team has been
inside. They’ve viewed the property. The neighborhood, its track record, everything.
I’m going to buy it. Now, by the way, if you’re not Kris Krohn, you might buy a
property that has a 20% annual ROI. That would be awesome. I have really
high standards. Some people can’t even figure out how to get a 10%
return in real estate based on their backyard or having never
been a landlord before or trying to figure out how to deal with negative
cash flows. This is some of the cream of the crop real estate that’s out there.
Today’s video was really just about saying, “Don’t be afraid buy a proforma.”
Look at crunching the numbers. And it’s simple. You buy low, you sell high. What
are you getting compared to what you put in and there’s a
ratio. And at the end of the day, there’s expenses. Money comes in, money goes out.
What’s left over is a cash on cash return. So now, I can know my total
appreciation growth and I can know my cash on cash. The tax benefits on top of
that are just like a sick bonus. You get here to the end of this video, you’re
like, “Alright. This is sweet, Kris. You said that you’ll show me how to crunch
the numbers in this book for free.” So, go ahead and download it, it’s yours. I also
told you that if you want to have an opportunity to speak with a member of my
team for free and evaluate numbers for you, click the link below. My team stands
ready and prepared to serve you and help you figure out how to make the most
intelligent moves in the game of real estate even if the first move is “I don’t
know what I’m doing”. Because we all start somewhere. -Yeah. -Right?
-Yeah. -Tyler, you’re buying properties left and right, man. You’re out there
killing it. I want to thank you for being here today that actually break down
proforma crunching numbers. It looks intimidating at first. But guys,
come out to our live events. Tyler breaks it down. You can learn the stuff. You can
read about at my book. The resources are free and endless. Use them. Learn how to
do this and start winning in ways that everyone wishes they were because you
got one life to live.

9 thoughts on “How Do I Crunch The Numbers On A Real Estate Deal?

  1. Those are some priceless informations, I want to learn more about real estate, I hear sthat its the best thing to invest in

  2. People are amazed at how quickly I can evaluate a deal and make a decision to buy. What they don’t see is me practicing running numbers just like this daily, keeping myself sharp and current with the market! RUN NUMBERS EVERYDAY! The deals go to the quick and decisive.

  3. I know this is off topic Kris Kron but I would love to hear your opinion on “flipping” promissory notes ? I heard it is less competition but I don’t know if you can scale or even stay consistent?

  4. i cant believe you adults complain about this. Compared to HighSchool, this is Baby Work. I bet my lil Sister can even rock in real Estate

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