What’s going on everyone? My name is Brandon with BiggerPockets.com author of the Book on Rental Property Investing and the co-host of the BiggerPockets Podcast and today I want to show you my sort of by hand strategy for analyzing a rental property using what I call the “Foursquare Method.” Now it’s nothing revolutionary it’s just a way that I picture the analysis of a property so i can decide if a rental property is worth buying or if I just want to ignore. Maybe I want to find out what price makes a lot of sense this is kind of analysis that I do if I’m gonna do an analysis by hand, so I’m going to walk you guys through real quick and hopefully you get some good ideas out of it be sure to add questions in the comment area below this video if you have any questions and jump into BiggerPockets.com if you want to learn more about analyzing rental properties or buying rental properties. BiggerPockets.com is the real estate investing social network marketplace and information hub so we’re here for you every step of your journey alright with that let’s analyze the deal. I will say this as well if you enjoy this video if you think this is a good helpful video do me a favor give me a thumbs up on this youtube video. It just helps YouTube know that you’re enjoying it so you watch it let me know if you like it and if you liked it thumbs up. Alright we’re good. Alright I’m going to talk about the foursquare method for analyzing a rental property the numbers on a rental property. So, to begin with I’ve got four boxes that i’m going to talk about and i’m going to talk about each one this one then this one then this one and then this one. We’re going to start talking about income now that’s usually the easiest for people to understand sort of begin there so we can write this in the top “income.” Alright, so once we’ve got this box labeled income we want to figure out what goes in there so in this case the most common rent or income you’re going to get is going to be rental income i think most people know that makes kind of sense, rental income. Now the other types of income as well for example there’s like if you have a laundry machine you can have laundry income you can have a storage – amount of a storage shed on the property you might have something else other miscellaneous income, but generally speaking rental income is going to be a primary source of income and so what we’re gonna do is we’re gonna figure out how much that is now today we’re gonna analyze a local property and it is a duplex see the picture right here this is the property we’re going to analyze together and this property is on the market we’re gonna say for two hundred thousand dollars now your area might be cheaper more expensive for duplex don’t worry about it. This works better if you can buy a house for three dollars and a pack of smokes or if you’re gonna spend spend a million dollars on a duplex it doesn’t matter the numbers all work the same way so we’re gonna say 200,000 or for this property just FYI and it a is a duplex so each unit we’re gonna say runs four thousand dollars each so for the math geniuses out there a thousand dollars x 2 equals two-thousand-dollar so we’re gonna go ahead and type in here you know what I mean another marker for the numbers i think it’ll make things a little bit clearer maybe so for the rental income we’ve got two thousand dollars per month all right now don’t mind my terrible handwriting I’m doing my best here today on the hand this is actually good for for me so we’ve got our income rental income we don’t have on this property we’re just going to assume we don’t have any laundry we don’t have any storage and rocking having miscellaneous so i’m gonna go ahead and and say that our total income for this property so I’m going to say total monthly income is going to be equal to two thousand dollars per month and i’m going to like kind of box this off so we know that this is a special little area right here now we’re done with section one we’re done with box number one now we’re gonna move on the box number two and that is the expenses for the property meaning the monthly expenses how much does it cost to own the property and here’s where a lot of investors people trying to buy rental property mess up because they’re trying to buy property and they think it’s gonna be good deal they don’t understand all the expenses and so I’m going to do want to list them all out here so first of all let’s go ahead and label this expenses if you’re wondering why this box is smaller than this box because there’s a lot more expensive than income and so we want to have room for that we’re going to listen to some of the most common ones now if you’re brand new to this and you don’t know what these all are you can figure them out talk to local investors agents whatever or use this list in fact i’m gonna go ahead and put together this entire her some document here for you in a downloadable spreadsheet that you can just download today try it out see what you think just got a bigger pockets dot-com / analyze rental property that’s bigger pockets com such analyze rental property you can download this entire foursquare a PDF that you can then fill in your own to analyze your rental deal so let’s go back to the switch but you can fill in on paper if you want later but for now let’s go ahead and just list them here we’ve got our taxes we also got insurance on the property now ensure ensure and all right now we’ve got some have tax insurance is incorporated in the mortgage we’ll talk about that a little bit mortgage but for now with google taxes insurance maybe that utilities utilities and utilities is made up of a number of things for example can be made up of electric electric commit of water sewer garbage and maybe gas building the most common utilities for a property now next we’ve got after that we’ve got things like HOA fees homeowners association fees if you happen to have any over there you might have a lawn care law nor snow and then you’re likely also going to have something known as vacancy they can see that means every month we want to set aside a little bit of money knowing that at some point it’s going to vacant and we’ll talk about how much to do that there a second we got our vacancy we’ve also got our repairs we’ve got our was called capital expenditures which we abbreviate as capex capex is like saving up for big things like you know every 20 years you need a new roof so how much did you set aside every month for a new roof for new water heaters new appliances new carpet those big items want to set aside a little money every month for that and then lastly well almost lost that we’ve got our property management go ahead and write that here property man image and then we’ve got very last is our mortgage if you don’t pay cash more games alright so those are the most common expenses you’re going to face now in your area you might have a few other ones again talk to local investors see what kind of expenses they are facing but these are the most common in my area and most investors areas so now we’re going to go through and we’re gonna write down what the mountains for each one of these so now each one of these can be figured out one of time so if you’re not sure what the taxes go to your tax assessor and find out what taxes are if you’re not sure what insurance will be talked to insurance broker and so each one can be figured out what time the more you do this the more general numbers you’ll get ten understand so in this example of our two-thousand-dollar property we’re going to assume that taxes are gonna run let’s just say a hundred and fifty bucks a month now maybe you live in an area where taxes are super cheap or maybe living area where they’re expensive don’t worry too much about it again the numbers work about how you doing we got a hundred fifty dollars a month there now insurance again that could differ a little bit but i’m gonna go ahead and guess about a hundred dollars a month in this property now utilities sometimes tenant pays them sometimes the landlord pays in this case i want to say that this duplex with a you know a nicer duplex it’s already been separated so we’re gonna have a tenant pay their own electricity their own water sewer garbage and gas going to pay all their own utilities so for us as a landlord we’ve got a zero dollar charge there now this property will say is not located in HOA area so we’ll say zero dollars there will even say that the tenant makes maintain their online and their own snow removal so we have to worry about that they can see though we have set some money aside for that every property i want to set aside money now in my opinion I in my area my company we run about a five or a little less than five percent bacon so usually like three or four two three four but i like to go to have to estimate maybe five percent now 5% of what we’re talking of the rental income so for this case if I took five percent of two thousand dollars we’re looking at about a hundred dollars a month now we’re going to set aside just for the fact that someday the property’s gonna sit vacant so next we’ve got repairs now repairs and capex are kind of link together because they’re both about fixing the property up now repairs are more likely that you know the tenant damned put a hole in the wall or damage the the carpet little spot you gotta fix things right capex is replacing things so typically what I like to do is I like to do you know maybe again it will depend on the quality of the property how new it is you know is the roof already 20 years old we’re going to replace that sooner so there’s a lot of factors go into it but typically i like to see around maybe a hundred dollars a month for repairs maybe fifty to a hundred per unit and so in this property I’m gonna go ahead and say repairs are gonna be a hundred bucks a month and this is not an exact science there’s no way to really know that is a 1 there there’s no way to really know but we can make an educated guess that about a hundred dollars a month between the two properties and capital expenditures on this property I’m going to also go ahead and estimate about a hundred dollars a month so total each month were set aside a couple hundred bucks a month for those big items a lot of messages don’t do that but i think i think it is a smart thing to do because those things do happen I mean imagine you about a rental property and then 10 years down the road your cash phone a couple hundred bucks a month making some good money couple years down the road but you know you have to put a new roof on there goes 10 years of income you just 10 years of profit loss caused you to put a twenty-thousand-dollar rough on you have to save up for those things and so I make sure it says that a little bit of money for that next you got a property management now you can manage yourself but in this case I want to go ahead and assume that i’m going to manage have a property manager typically my area property managers about ten percent of the rent so we’ll stay tuned dollars a month and lastly we have our mortgage now that’s not really a thing you can just figure out your head usually but there I million online mortgage calculators in fact bigger pockets has won a bigger pockets calms us bigger pockets com such calc CLC but you can go anywhere find a cheap I mean online free mortgage calculator all over the place so in this case when i plugged in you know we said earlier that the property was a two-hundred-thousand-dollar property now we have to make some assumptions here i’m gonna put down some money for a down payment etc so let’s just hypothetically say we’re going to get a hundred and sixty thousand dollar mortgage if i put 260,000 our mortgage at maybe five percent interest over a 30-year span which is fairly typical in today’s uh I guess the interest rate economy we’re looking at about what is the 860 dollars a month for a mortgage payment so at this point we’ve got a list of most of our expenses if not all of our expenses now we’re going to add all these up together we’ve got you know 869 10 6011 60 1260 1360 1460 1560 1610 is that what you guys got hope so okay so at the bottom now with our total monthly expenses and only have room for it i’m gonna put here total monthly expenses pardon my awkward standing here not used to write on a whiteboard total monthly expenses of what we say 1610 put a little box on that we want to call it important whoo alright so we’ve now got our income we’ve now got our expenses now it’s time to move on the box number 34 box number 3 we’re looking primarily at cash flow meaning how much extra money do I have every month now this is usually pretty easy to calculate once you’ve got box 1 and box to finish the box 3 is going to be your cash flow into know that all we want to do is income minus expenses so our income on this property we already know let’s go back to our red marker our income was two thousand dollars per month or expenses was six 1610 and so to figure out our actual monthly cash flow we’re just going to take this minus this and we’re left with that 390 dollars and that is our total monthly cash flow i’m going to put a little box around that because it’s an important number so we’ve now got income expenses cash flow but the question is is 309 dollars a good amount of cash flow you can’t answer that question it’s kind of like asking you know is I don’t know peanut butter the best color i don’t think that he doesn’t really make sense because we don’t know anything about that number we don’t know what’s around it we don’t know how much money i mean did you put a billion dollars in just to make 390 bucks or did you put two dollars down to make three ninety dollars so we have to compare it to how much money we put into it and that is called your cash on cash return on investment big word cash-on-cash return is how we’re going to summarize that and that is a box for is for here so we’re gonna write cash-on-cash are oh I return on investment now don’t be complicated or don’t get confused by the kind of complicated jargon here all it means is is your money earning what kind of percentage of earning if you are stick a thousand dollars in the bank and then they paid you a hundred dollars this year that would be a 10-percent cash-on-cash return it’s like what kind of return on your cash flow are you getting so we’re gonna have to figure that out now now that’s a pretty easy thing to figure out but we have to first determine how much money we put into a deal that’s the first thing we do when we want to look at return we don’t know how much money we put into it so to do that we’re going to add up all the money we put into this so we’re going to start with our down payment and what else would we have to pay when we buy property with maybe do closing costs so closing costs what else maybe I repair money or rehab budget but shit so we have a downpayment closing calculator repairs and maybe some miscellaneous tools and miscellaneous other who knows maybe you in the process I don’t know maybe you want to who knows whatever appraisals whatever but that’s kind of part of closing house but either way when you buy property that a lot of areas you might spend money on to get it so we’re gonna add all those up together in to get our total total investment alright so our down payment in this case earlier we talked about the property was listed at 204 two hundred thousand dollars so if we bought it for 200,000 and we put eight will say twenty percent down payment twenty percent of 200,000 is 40,000 so a down payment may switch to the red marker 40 thousand dollars for down payment now we also closing costs to buy the property we bought it to pay the real there are not alter the the title company or the attorney way to pay for an appraisal to pay for loan documents and loan fees and all that so we’ll say closing costs in this case was $3,000 now maybe it’s more maybe less in your area depending on your loan in your area but will say three thousand dollars and let’s just for simplicity when we bought the property we want to repaint the outside maybe want to make it look a little nicer so we’re gonna say how about seven thousand dollars for a rehab so again I think that’s usually painting the property or doing whatever so in this case our hypothetical property here we spent forty thousand a downpayment 30,000 closing costs seven thousand rehab and I’m gonna leave this one blank will say zero dollars and miscellaneous other but adding them all up our total investment was at this point $50,000 we’ve invested fifty thousand dollars so and here’s where we’re going to figure out our total cash on cash ry to figure that out we want to take our annual cash flow which we already well we know our monthly cash flow so we’re going to take our monthly cash flow 390 multiply that by twelve and we’re going to get I did that calculation earlier 4680 4680 dollars so we got 4680 dollars in annual cash flow and now we’re going to divide that sowed to figure out your cash on cash return we’re simply going to take our annual annual cash flow and we’re going / our total investment so annual cash flow we already know was 4003 of 4,000 troops 680 dollars divided that by our total investment which we already figured out right here 50001 we left with in this case 4680 by 50,000 trusty calculator works out to a nine point three six percent actually comes out at point zero 936 but we want to make a percentage we just multiply by a hundred it and add the % so we’re left with a 9.3 600rr cash-on-cash ROI is equal to nine point three six percent so that is how we analyze a deal using the foursquare method we got four boxes one two three and four to figure our income expenses are cash flow and our cash-on-cash roi now the question becomes and all of you are wondering is a 9.3 6% cash-on-cash return good now this is going to get a little bit tricky and we could talk for hours on this but this is really going to depend on your goals your strategy what you’re trying to do and what other investments you can have for example let’s say you can stick your money in the stock market today and know that you can make twenty percent now I that’s doubtful but let’s just say you could do that right then nine doesn’t sound very good but let’s say you’re earning two percent on your stocks over the past 10 years well then maybe there’s a fantastic return in fact over the last like hundred years the stock market’s been like six seven percent average so this actually does a little better than that so if i was comparing between this and put it into the you know SMP 500 i might choose this over that now another thing we did not talk about today we can only do it with this method and gets a lot more complicated by hand and that is your overall return or even more complicated your internal rate of return what those numbers do is they go a lot deeper into well are you building equity for example let’s just say that this property we bought everything worked out fine we won’t got the numbers we came up with a nine point three six percent cash-on-cash return what if that property wasn’t worth 200 thousand dollars what if we got an amazing deal and in reality all the other duplex in the area were selling for a million dollars i mean let’s be crazy a million-dollar so we can turn around tomorrow and sell this property for a million bucks well now this deal looks a whole lot better right because although our cash on cash return meaning the return on investment from our cash flow although that is 9.36 percent we’ve got a ton of equity that we can sell the property and make a ton almost like we’re flipping it right and so cash-on-cash is just one aspect to look at if you have a proud with a ton of equity that could be another thing and for that i like to look at your total return so let’s say after five years if the property went up in value three percent per year and we sold it and weep a realtor fees how much would we get how does that turn out to an overall return that is the number that I care a lot about and that’s something that we’re not going to be able to do by hand very easily you might spend a half hour 45 minutes to an hour figuring all that out so what I recommend instead if you guys are interested in learning more about analyzing deals jump onto BiggerPockets.com/Analysis BiggerPockets.com/analysis – now this this what that site is it’s the home of a Bigger Pockets rental property calculator housekeeping calculator a borough calculator which is a kind of cool thing you can go look up and then the whole seven calculator what these calculators do is they let you to basically doing this process but they do it in a much more organized manner just four simple pages almost like your page for in your details you have to pay for income and expenses you’re basically entering all this number in but then it’s also going to ask you a few questions like what do you think the future is going to look like what kind of returns you want looking for what kind of appreciation we expect in the future what do we think the property’s worth today and then you can edit the the final results of that you can see like this PDF document that shows you what’s gonna look like next year the year after year after you get some really good estimates for the future including total returns i highly recommend digging into those calculators you can get to my BiggerPockets.com/Analysis so the last thing I’ll say about analyzing properties every single week every single week now on BiggerPockets I host a live webinar a live class kinda like this come from using a computer and sitting down and being lazy and uh I teach different aspect of real estate some time talking about buying duplexes sometimes i’m talking about flipping houses sometimes talking about analyzing deals finding deals all that kind of stuff and so I do that every single week they’re completely free to attend alive and so I want to encourage you guys to show up signup BiggerPockets.com such webinar and the reason I invite you that is because every single week we analyze the deal together cuz i think this analysis process is so important to every week we did do a property a real-life property very specific when we find it on the MLS together or on the market we find it and we look at it we analyze that we figure out where it’s worth buying where it’s not worth buying and we have a lot of fun doing this again you can sign up for that BiggerPockets.com/webinar and i hope to see you at one of the BiggerPockets webinars so I think that’s a that’s about it for now if you guys have any questions like I said jump into the comment section of this page I ask your questions and if you know the answer please jump in and answer questions as well I can’t get to all of them so be sure to counteract people and like I said check out BiggerPockets.com /Analysis to dig into the property analysis tools on a BiggerPockets.com So, hopefully you guys have a good indication our understanding now how to analyze for cash flow and cash on cash return how to do the numbers on a rental property i will see you around the BiggerPockets community I’ll see you on the BiggerPockets Podcast on BiggerPockets webinars maybe just hanging out in the forums for BiggerPockets.com my name is Brandon signing off.