Lecture Notes: Analyzing Rental Property Deals

Introduction

• Presenter: Chad Carson from Coach Carson.com
• Topic: Simple approach to analyzing rental properties
• Objective: To determine if a rental property is a good deal using simple calculations
• Tools: Back-of-the-envelope analysis, no fancy calculators or spreadsheets needed

Back-of-the-Envelope Analysis

• Inspired by Warren Buffett: "If you need to use a calculator or computer to make the calculation, you shouldn't buy it."
• Importance: Allows for quick, approximate calculations to determine if a deal is worth pursuing

Purpose of Buying Rental Properties

• Achieve financial independence
• Build wealth and generate income
• Two main ways to make money:
  1. Income: Collecting rent minus expenses
  2. Equity: Buy low, sell high strategy

Analyzing Income

• Gross Rent Multiplier (GRM):
  • Formula: Property Price / Annual Rent
  • Example: Property worth $144,000, monthly rent $1,000 => GRM = 12
  • Lower GRM is better (e.g., 8 in Detroit vs. 30 in San Francisco)
• 1% Rule:
  • Monthly rent should be ≥ 1% of the total purchase price
  • Quick approximation for initial screening
• Cap Rate:
  • Formula: Net Operating Income (NOI) / Total Purchase Price
  • Focus on income production without debt considerations
• Net Income After Financing:
  • Formula: NOI - Financing Costs
  • Important for understanding cash flow after debt service
• Cash on Cash Return:
  • Formula: Net Income After Financing / Total Cash Invested
  • Useful for evaluating return on initial cash investment

Analyzing Equity

• Equity Definition:
  • Formula: Assets - Liabilities = Equity
  • Goal: Increase equity and net worth over time
• Ways to Increase Equity:
  1. Buy at a discount
  2. Add value through improvements
  3. Pay down mortgage
  4. Benefit from passive appreciation

Step-by-Step Property Analysis

1. Set Goals:
   • Determine what you want from the property
2. Find Property:
   • Use tools like Zillow, Realtor listings
3. Gather Information:
   • Approximate rent and expenses
4. Create a Snapshot:
   • Use formulas to get a snapshot of the deal
5. Study Comparable Sales:
   • Look at market values, potential after repair values
6. Perform Equity Snapshot:
   • Evaluate current discount and after repair value

Conclusion

• Overall Process:
  • Use these methods for a quick, effective analysis
  • If the deal looks good on paper, further analysis can be done
  • Warren Buffett's philosophy: don’t overcomplicate, the deal should stand out

Additional Resources

• Analysis Cheat Sheet: Available for download to guide property analysis
• Engagement:
  • Subscribe for more content
  • Engage through comments for questions and feedback

These notes summarize the key points from Chad Carson's approach to analyzing rental properties using simple calculations as presented in his lecture. This method helps in quickly determining the viability of a real estate investment.