How To Analyze An Investment Property with Mike Swenson

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This is another topic that we know people want more information on. So as you're putting out your goals for this year, we wanted to get this into your hands at the beginning of the year, so that you can start your analysis on existing opportunities to help you hit your goals for 2022. Mike Swenson goes through an investment property tracker tool to show how you can analyze the viability of an investment property using actual properties out there. This will help you determine if it's a property that will meet your investment objectives or not, whether you're looking to buy & hold or whether you're looking to do a BRRR. We look at picking assumptions on expenses & loan terms, how to estimate owner paid expenses, how to find out reasonable rents for the area, how to run an analysis using current rents vs proforma rents, and some of the numbers to focus in on that may help you decide if it's a good investment for you or not. This episode will give you a great foundation to go out and begin analyzing properties right away.

In this episode, hosted by Mike Swenson, we discussed:

• Picking the right property on your first deal will accelerate your growth or hold you back from future properties, which is why it's important to understand the numbers.
• When analyzing properties, this of it like a baseball analogy. Investment properties are like a single, a double, a triple, and a home run. Home runs are great, yet are more rare. Therefore, hitting singles and doubles help you build momentum for the future.
• Find a great deal calculator/analyzer - focus on getting 80% there with your initial calculation to simply see if it's worth pursuing further. You can always go back and dig deeper on the remaining 20% when you view the property before an offer, or during the inspection/due diligence period. You may not have ALL the information before writing an offer.
• Use a tool like Craigslist, Apartments.com, or Rentometer.com to find and estimate current & proforma rents
• Always confirm as much info as you can - property taxes, assessments, insurance quotes, rents (viewing leases if possible), utility costs, etc.

Timestamps

00:48 -  Overview of analyzing a deal.
01:38 - Six-step guide of how to buy an investment property in 2022.
03:42 - Talking about analysis calculator.
11:25 - Calculating expenses using analysis calculator.
21:26 - Final analysis using analysis calculator.
27:29 - Knowing more about analysis calculator.

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Full transcript here:

Mike Swenson 

Welcome to The REL freedom podcast where we inspire you to pursue your passion to gain time and financial freedom through opportunities in real estate. I'm your host, Mike Swenson. Let's get some real freedom together.

Mike Swenson 

Hello, everybody, welcome to another episode of The REL freedom podcast. I'm your host, Mike Swenson. And you know, we've got a lot of great guests lined up for this year. And yet at the same time, I know that some of this key foundational information for you guys to pursue multiple streams of income to work on building wealth is really important to get to. So I wanted to make sure that I took some time at the beginning of the year to get some of that information out there.

Mike Swenson 

So the first episode of the year, right, we had the six step guide to buying an investment property. And then last week, our episode was talking about, you know, sharing the first time doing a flip. And then today, I wanted to get into the nuts and bolts of analyzing a deal, right? It's a huge part of picking investment properties, which one should I choose? How do I go through that analysis. So I'm going to do my best for those folks that are listening to this on the podcast, to be able to explain things to you, since you may not be able to see my screen. Otherwise, what I would do is encourage you, if you're not watching, go to our YouTube channel real freedom, that's our E L freedom. And go check out this episode. And then you can see the screenshare that I'm going to do here in a little bit, where we walk through some of the spreadsheets that we use and some of those details. And without further ado, we're gonna get into the episode.

Mike Swenson 

So we had that six step guide of how to buy an investment property in 2022. Those six steps were identify roadblocks, right? What's stopping me from getting into that property, identifying objectives, analyzing the property, which we're going to cover today, build your team, make your goals, and then ultimately make the jump. So I think what holds some people back is not really knowing what's a good deal, you know, what do I do? How do I analyze it part of it, like I've said in the past is getting in and getting something and yet at the same time, you're tying up your money for a while. And so you want to make sure that the money that you tie up, is going to hopefully make more money. So that's where sometimes we want to do a good thorough analysis on that first property to make sure that this is going to be a property that sets up future properties.

Mike Swenson 

When I work with clients, I often tell them, you know, I'm incentivized to do a good job for you to pick a great property. Because if you're going to make money on this property, it's going to help you to buy more, you know, there is a paralysis by analysis, which I'm accustomed to myself, my personality kind of lends towards that. And yet, at the same time, you want to make a good analysis. Because if you're putting down 20, or 25%, on a poor investment, or kind of an average investment, that's not going to allow you to make money as much money in the future because your money is just sucked up in this investment. So that's important, you know, a podcast that I listened to that, that talks a lot about investment properties gives an example of think about your investment portfolio, kind of a baseball analogy here, right, you've got a single a double, a triple and a homerun. Now a homerun, or maybe even a Grand Slam is gonna be that awesome property that makes a ton of money has a lot of appreciation, we don't always hit homeruns, right? Homerun is a rare thing, a grand slams, and even rare thing. So focus on finding those good singles and doubles, that you can continue to hit on to be able to build that portfolio. So I know there's there's awesome opportunities out there, but find those good singles and doubles, especially early on, so that you can build and grow your portfolio.

Mike Swenson 

The other thing, when it comes to analyzing properties, it's not as challenging as it may seem, if you get yourself a good analysis calculator, you could reach out to me there's other ones out there that you can go find, but it's really just doing it. And after you do a handful of them, you're gonna understand and now for me when properties come up in the MLS, typically every day, I'm in there looking at new properties that have come on, I can tell mostly on a snap judgment, I just know, based on the purchase price based on the estimated rents, this isn't going to be a good fit or how many utilities are included that the owner has to pay versus the tenant. Now I can find that out. Whereas when I first started, I had to take the time. So what was maybe a 10 minute process or a 15 minute process. Now in most cases, I can tell within seconds of looking at it and so you're kind of think about it as a funnel, you know, you know a lot of this stuff isn't going to work you're kind of looking for what's the the ones that I'm going to spend more of my time on. So then I can really hone in and make sure that those numbers are clean to ultimately put in an offer. And then after the inspection period, stick with that and move forward. So pick a good calculator, a good analysis tool.

Mike Swenson 

I'm going to quick go ahead and share my screen for those folks that are on the YouTube video might have not reviewed these properties ahead of time, because I want to be able to show you guys what that analysis looks like. And then I do have a couple of calculator tools. So these are just some multifamily properties that have come on the MLS in the past handful of days from when I'm recording this, I'm going to go through and just kind of show you how we make those numbers. But first off, I want to show you a couple of calculators that I use. So here we've got a buy and hold calculator. And so I picked this up, you can see here, agents invest, if you've ever heard of them, you can go to their website and download their free calculator tool. That's the one that I'm using today that I'll just kind of show you a little bit of what's included on there. This is maybe a little bit more advanced than most people would want right out of the gate. But obviously, we've got the you know, the asking price, what the suggested offer prices, downpayment.

Mike Swenson 

If you're looking at kind of traditional financing, if it's a multifamily unit, you're going to be looking at paying 25% down, if it's a single family home that you're looking to acquire as an investment, you can usually get that for 20%. So this is kind of most traditional closing costs, you can estimate, you know, whether it's one or 2%, what that might look like. So then obviously, here we've got income, so rental income, and then on the side you looked at there's current rents, and there's pro forma rent. So current rent is what has it been rented for today, pro forma is what could it reasonably rent for in the future. And so you might want to look, a year from now, two years from now, three years from now, you know, obviously, 10 years from now it's gonna look a lot different, but at the same time you want to come up with maybe it's not the best investment today. But after you have an opportunity to fix it up, and maybe change that rent, there might be some new opportunities here.

Mike Swenson 

So and then this calculator just has a little drop down menu, so you can switch between the two, whichever one you want it to analyze vacancy rate, I would suggest looking at your state that you live in, it varies drastically across the United States, to looking at your state looking at the type of properties that you might be interested in, you know, what's a reasonable vacancy rate, I Minnesota here, where we're at vacancy rates are a lot lower, I think we're maybe the fifth or sixth lowest vacancy rate in the United States. And then monthly expenses, this would be landlord paid utilities. So looking at, you know, water, sewer trash, gas, fuel, there's any HOA dues, you want to put that in here annual operating expenses, you've got property taxes, of course, insurance. And then here we've got an annual capex budget, which you can plug in whatever number you'd like or whatever number you think you can kind of go property by property, or just a nice clean number that you use to analyze all all the properties. And then you can always drill down later. So we've got capex, maintenance, budget, and property management.

Mike Swenson 

So that's going to depend on Are you hiring a property manager? Or are you looking to manage the property yourself, those are the different annual expenses, and then you've got a grand total, they're looking at the property analysis, you can see how all those numbers run, things that people like to focus on in terms of numbers, calculations that matter, the capitalization rate, monthly cash flow, obviously, the annual cash flow kind of goes hand in hand with the monthly and then this cash on cash return. And so the nice thing is the cash on cash return is looking at the actual cash that you're putting into the deal. What can you expect to earn back on that? So how much money is it tying up? And what can you expect to get onto that return? It's also going to factor in a principal reduction.

Mike Swenson 

There's a mortgage calculator on a different spreadsheet where you can kind of see an amortization schedule, and then it's also going to factor in the appreciation. So appreciation is down here at the bottom. You know, depending on your market, you know, some markets on the coasts, the appreciation is crazy. And it's tough to find great cash flow. Here in the Midwest, you can kind of get a little bit of both, depending on where you're at. There are cities in the Midwest that are fantastic for cash flow, maybe not as much appreciation. And then in the Minneapolis, St. Paul Twin Cities area and kind of surrounding I'd say there's a good combination of cash flow gains, as well as appreciation and some neighborhoods are better than others. Some cities are better than others. We're just going to go ahead and I'm just going to show you a couple properties here just to see how this gets filled out. A little bit more of the quote unquote bread and butter for duplexes are in this two to 300 range. So I'm just going to pick one here.

Mike Swenson 

 So here we've got a property where the list price is 275. You can see here taxes with assessments is 3536. And then here it says homestead No. So that's important because if the property at least in Minnesota, here we have if it's homesteaded that means it was previously owned by an owner occupant, and those taxes are going to be reduced because they got a tax break because it was a homestead property. So in this case, it shows that the property is already not homesteaded. And so then the US The new owner coming in, you're not going to see a big spike in those property taxes. So something important to check there, the difference between the homestead and the non homestead is going to make a difference on your taxes. So, that being said, Here, it gives you not all of these show what the current rents are. And so you, I'll show you where you can go and analyze these. But here, it looks like monthly rent is 995 in each unit, then here, they've also broken down what those expenses are.

Mike Swenson 

And so this is in the MLS, the average person without a license doesn't have access to this. So I can certainly be a resource for you. That's why real estate agents can be helpful because they can get some of this information for you. And then you can clearly see here says you know, what's the owner expenses, you've got the taxes, the insurance, electric, and then maintenance, repair, and water and sewer. So we're not always going to know that information up hand, we're not always going to know how much it is. And so that's where you're going to develop some assumptions over time of what that could possibly be. But here, they give us those numbers. Other things to think about is, you know, you want to make sure that is water and sewer something that's paid for by the tenant, some cities allow that some don't, some based on how the house was set up, they might not have the electric or the fuel broken out by tenants. So it might be a lump sum that's paid for. So each unit is totally different. And that's where we've got a spreadsheet to help with those assumptions.

Mike Swenson 

So let's go ahead and just plug in some rough numbers here. And we'll just kind of give give a sense of what that might look like. When we pop over to our tool, we can see 275 was the the asking price, multifamily, we'll plan on 25% down, and then we can see current rents for 995. And we'll put in 995 here, and then the rental income is going to be based on current rents, property taxes we had were 3536. So we'll keep with that insurance estimates, that's up to you guys to figure out might be good to have a good relationship with an insurance agent to kind of get a plan for that a lot of times we might see, you know, it obviously depends on the area depends on the size, something in this general range, where I'm located might be about $1,500. So we'll just plug this in as assumption I should say at the beginning. I'm not a financial adviser. I'm also not an insurance agent. And so please check with your professionals, this is not financial advice that I'm giving to you. So make sure that you check with those professionals, I'm just showing how to use a spreadsheet. And I'm plugging some numbers in here for you. But as you'll see, it's not too complicated as you get going.

Mike Swenson 

So we have those in landlord paid utilities, we can go back here, and we can see you know the estimate. So we've already got taxes and insurance accounted for maintenance and repair, we've got accounted for water and sewer and electric as essentially what we need to plug in, we know that the total for electric here is 3900. Water and Sewer a lot of times may be about 150 bucks a month on a duplex is a reasonable number, it really just depends on the property insurance here, actually, they've got their insurance at 906. So we'll just plug in here 906 Ask for their insurance agent to see how you get 906 for your next quote.

Mike Swenson 

So we've got that. And then here for landlord paid utilities, we had 3900, we know there's going to be something for water and sewer. So let's just plug in 450 here. So as you can see, now as we start to look at these numbers, we're in a negative cash flow situation. Now I should say this is dependent on the interest rate dependent on the loan points, that's going to be up to you and your lender. To figure out what those assumptions are. I'm just putting in a clean 4% Just so we can get an idea here. So you can see right now this is an A negative cash flow situation. So what we could we potentially do? One is we look at okay, what's the rental potential? So you're gonna dig in here, you're gonna look at photos, you're gonna look at, you know, what can we possibly do to increase the quality of the unit to maybe have some some rents in the future that are a bit higher. So here we can go back and we'll see you know, it's a four bedroom, two bath unit. So it's two in one in each unit, two bedrooms, one bath. There's also a pet fee Oh, actually here.

Mike Swenson 

So here we've got $35 pet fee $50, water trash and Bert reimbursement to the owner, and then it gives her when the lease expires. So you are collecting additional rent, so we could put that in. So one unit will will bump up by 35 bucks. We also know we're getting $100 in water and trash reimbursement per month. So let's go back in and we'll adjust. So now we'll hear go down to 350 factoring in that $50 per month reimbursement. And then this one actually had a $35 pet fee. So that's gonna put us at 1030 and now the numbers are a little bit better. Yet it's still in the negative cash flow plus So let's just say and I'm not in any way saying that these are the potential rents for this unit, nor have we looked at pictures together. And I purposely did that, because I don't want to make any promises or, or, you know, that's a different episode that we can talk about. But let's just say as an example, you know, once we fix things up, maybe in a lot of cases, these are tenants that have been there a long time and, and we haven't had rent increases, because they've been great. They communicate well, they pay on time, and you want to keep it low for them. So they continue to stay there, let's just say market rents might be 1250. Or even, let's just say it could potentially be 1300.

Mike Swenson 

So we plugged in 1250, in the performer rent section, and then we flip over the monthly income to a pro forma. Now you can see that we're at a positive cash flow, and a positive cash on cash return of 3.98%. So that just shows how I always tell people I was a finance major, you know, you can make numbers tell any story, you just have to now look at what's realistic here. And that's going to be part of that due diligence process. So you're, you're obviously going to be renting out this unit for the future. And so while these might be the current units, they gave the, you know, the leases are going to be up. If that's something where you know, the tenant wants to vacate the property, you've got an opportunity to come in and do some renovations and repairs. Or like I said, maybe the market rents are just higher, and you don't have to do much to the unit, you can have the rents be higher for that next tenant. So this just kind of shows how those numbers can play out.

Mike Swenson 

Like I said, Without looking at pictures. Now you're at a monthly cash flow of 253, positive and cash on cash return of 3.98%, you've also got principal duction reduction appreciation, I have 7%, just as a nice, clean number. So your total return on the investment here would be 33.97%, based on your one. So like I said, That's not advice, you can choose if you feel like that's enough for you or not enough for you. So that's a great example. So now we can see just I'm just kind of picking two numbers here, the cash flow of 253, cash on cash return of 398. So let's go look at another example just to see how that compares. So we'll go back and we'll pull up a different property here, pick this one in St. Paul, for 285. So here we have taxes are actually pretty similar. There's an assessment balance, a lot of times the assessment balance, this particular property happens to be in St. Paul, a lot of times you'll see that assessment balance show up, it's actually the water that's being paid for. So let's go down and continue look. So this is actually three beds, two baths, so there's one less bedroom, head on down. So there's not any rents listed here. So we don't necessarily know what that looks like.

Mike Swenson 

We also don't know expenses are being paid for because that's not filled in. So so now it's up to us to go take a look at some assumptions. So let's go back here. So we know we've got 285, we know we've got, let's just say 2757. And then we'll we'll assume the assessment is probably water. So let's go back to our calculator, we've got 285, we'll plug that in.

Mike Swenson 

Rental income, we'll address that in a second. So in this case, let's just assume that the gas and the electric are paid for and it is just water. A lot of times like I said maybe about 150 per month, property taxes 2757. So go back to that 2757. Insurance, let's just keep that the same, just to see a comparable of what that looks like here for rent. So So current rents, pro forma rents, if we have one, one bedroom, you know, maybe we just say 1000 instead of 1250. And I'll show you in a second how we're gonna address that piece. But you go back, and we've got this filled in for pro forma monthly cash flow, positive 286 cash on cash return 4.35. So actually pretty comparable, when you look at those same assumptions. Now any number and this is where I'm going to come back later and talk about the due diligence, any one of these assumptions could change, this is going to affect your number. So that's part of the process leading up to putting in the offer. And that's part of the process from when you have an accepted offer to if you have an inspection and some inspection contingencies. That's where you're really going to dig into these numbers deeper and make sure that that's a property that you want to move forward with. So, you know, let's just say as an example, we do find a comparable property just so you can kind of see how these numbers change.

Mike Swenson 

We had that one of 250 Let's just say you found a property for 220 that had the same rents. So maybe it's not in quite as good a shape, but at the same time the rents are the same. Well now you find something for 220. Those numbers change your cash flow is 519 cash on cash return of 1021. So that's where neighborhood by neighborhood you want to check things out. So a lot of times people ask me, Mike, how do I know what to look at for rent? So I want to cover that quickly. Because here we're just kind of plugging numbers into a spreadsheet. There's a few places that I go one A good old fashioned Craigslist, right. So a lot of times people like to put Apartments for Rent housing for rent on Craigslist. And then because you get to see it on a map, it's a good way to kind of see, okay, what's reasonable for the area. So I'm just going to zoom in here. I just happen to have this up in St. Paul. So we'll just go and take a look at, you know, what's what's available here. So we've got two bedrooms, two baths. So I'm gonna go ahead and click OK, here's one for 1180. Here's one for 1373.

Mike Swenson 

But once you click on them, you can get a sense for sometimes utilities, you got to kind of bring it back to apples to apples comparison. But let's just assume these hours are the same 1373 and 1180. So now I know okay, that that 1250 range, maybe for a two bedroom is reasonable. Or if the high end here's is 1375. I've got a property that's really nice. I could plug in 1375, for that. So lots of options there. So Craigslist is a good place to go. Another one that you'll see a lot of times people use as apartments.com. Once again, similarly, I just had this pulled up for St. Paul, because I was just planning to the show St. Paul, you can click on the pictures find out as comparable to mine or not. And then another one that folks use sometimes is rent ometer. So I just plugged in a property here as I had this tab ready to go, two beds, one bath, and then here, this is actually in South St. Paul.

Mike Swenson 

You can see it gives you an average, a median, and then some different percentiles. So that's a great way to see, you know, what's a reasonable rent, and what what's something I can do, if you want talk to a property manager as well, they've got some tools, they've got a great handle on what rents are. So that's how you feel comfortable about those rents. So that's the tool here. The other thing I'm just going to quickly show is the burr calculator. This is for people looking to flip a property, put in some money, put in some repairs, oh, I should go back to the previous calculator, there is a spot where you can update renovation. So if you're thinking you're going to want to add, you know, $10,000 to get it to the rents, this is kind of that that current rent to perform a rent discussion, if you want to put in 10,000. To get from current rents to pro forma, here's how those numbers change, you can do that. So there's a spot up here for renovations. Alright, so going back to the burr calculator, similar things, you've got your asking price, you've got your estimated renovation costs, you've got after repair value. So a lot of times with the birth, the focus is what's what's that value going to be after I fix it up.

Mike Swenson 

Once again, a real estate agent can help you out with that to come up with a reasonable assumption, because it's going to involve, you know, some sort of refinance, that happens later. So you've got your monthly utility costs, you plug in, you've got your down payment, you've got your interest rates, a lot of times on a birth, your interest rates going to be higher, because you're buying it fixing it up and then going to refinance after the fact. And then you've got some refinance options, whether it's a 75% 85%. There's different things along with that, then what you're going to do on this birth calculator is you've got what's going to be the projected income after the renovation. So I didn't pre plan any of these numbers, this is just kind of how the tracker was set up. So you've got what's that income going to be? What do I think I can get? What are going to be my utility expected costs, once again, the annual expected, so it's kind of the same thing as what you would see in the buy and hold calculator the differences, you've just got the kind of the new financing options of what that could look like. And then you've got your cash on cash return and your total ROI.

Mike Swenson 

So that's a good estimate. I just wanted to show you guys those tools, how that works. And you can see, I'm not a rocket scientist, I can take those numbers, I can plug them in, and, you know, give give a good idea of that analysis. And you can see those cash flow month per month numbers change the cash on cash return the cap rate, those are numbers that people look at. And so you could really see, you know, I had a rental property that before I got into real estate, it's like, well, I don't really know if it's good or not. And so I rented it out and the cash flow was about even well, what if I was what if I sold that property, and I picked a property where it had a higher cash flow. Like I said, I was in that property before I was into real estate before I started tracking these tools. I didn't know any better. And so it probably negatively impacted my ability to purchase additional rental properties in the future because it wasn't that great of an investment. It was less than a single I would say in terms of cashflow for sure. Appreciation was okay.

Mike Swenson 

And so you want to test those assumptions, insurance, you know, get a quote from an insurance agent to make sure if I'm plugging in 1500 bucks, that it is that and it's not going to be 2500. And I'm going to lose about 100 bucks a month on my insurance estimate. So that's where that due diligence period is really important.

Mike Swenson 

So it turned out okay, we made a profit at the end. But that's to show the value of understanding those numbers and what that could look like so then what's going to happen is you find out those numbers you've got one where I've got Okay, a decent cash flow. I've got a decent you know, cash on cash return, I'm looking at making an offer and then you know leading up to that and then if your offer is the one accepted you want to do that extra due diligence you want to if possible, look at the leases confirm that the lease rates are exactly if there's current leases in place exactly what they said they are. Sometimes sellers make mistakes, sometimes real estate agents make mistakes. And so you want to verify those numbers, the property tax numbers, you can go to the county websites and verify those numbers to make sure that it matches what they say it is. And then to ask for some sort of rent role. If they could show utility bills to verify, you know, if I'm paying for gas and electric for 200 bucks a month, hey, do you have some bills that I could see, just to verify that or could you show me your books for the past 12 months, so that I can verify that because obviously, $100 difference on the cash flow makes a big difference, if you're looking at something that's going to cash flow, three or $400, the difference between 300 and 400 That's a big difference.

Mike Swenson 

Before viewing a property, you can do kind of 90% of the heavy lifting from your computer to where you don't want to go to a property unless it's going to hit those certain assumptions. Other things that are out there is there value add opportunities, you know, maybe converting a basement, you know, you're going to add it finish off a basement might turn a two bedroom into a three bedroom, something like that. Those are where you go look at those pro forma rents versus what the current rents are. So there's additional opportunities there. And then once you once you put in that offer, you think you've got all your numbers in, like I said, I highly recommend doing an inspection, you want to make sure that the property is as you say that it is there's not a AC unit or a furnace that went out, there's not some plumbing issues that you didn't know about, because that's going to affect those renovation budget.

Mike Swenson 

So, if you're kind of 90% of the way there at the time of the purchase agreement, you've come to a number that's pretty good. Go that last 10% During the inspection period, and then you've got everything in front of you to have that to move forward after the inspection period, and have that closing. So like I said, I you know, I want to make sure that you guys if you're interested in investing, if you're interested in building some multiple streams of income and building wealth, which is what the real freedom podcast is really about, I want to make sure that you have those tools in place. So that's why I did this episode.

Mike Swenson 

Thanks for taking the time to listen to that. If you have any questions about using those calculators or the assumptions or different things like that, feel free to reach out to me you can find me on our team's website, eliteadvantageteam.com or you know the links are listed in the podcast and on the YouTube page. So come find me ask those questions I want to help you out. I want to help you find great rental properties connect you with great lenders insurance adjusters, those types of insurance agents, so that you can find a great property and hit a good single and a double that's gonna set you up to build additional revenue and get some more properties. Thanks so much and we'll talk to you guys later.