The most important skill that you can have as a real estate investor is the ability to analyze a property. So, I'm going to show you how to quickly analyze a property in under five minutes. This is a tool used to quickly determine whether or not a property is worth looking further into.
We're going to look at something called the 50% rule in order to analyze a property in under five minutes.
The 50% rule is a quick first pass analysis of a property. It's something that a lot of people in the industry use just to be able to quickly look at a property and decide whether it's something that they want to look further into.
The 50% rule states that 50% of your rental income on your property, is going to all of your expenses, not including your mortgage payment. These expenses include taxes, insurance, vacancy rates, management, ongoing repairs and maintenance. Basically everything except for the mortgage payment.
The remaining 50% is going to go towards your mortgage payment and whatever is left is your cash flow.
Using an example, let’s say you have a property that is $2,000 a month in gross rent. Cut that in half, so 50% of $2,000 is $1,000. $1,000 is going to go towards all your expenses except for your mortgage payment and the remaining $1,000 is going to go towards your mortgage payment and whatever is left over is going to be your cash flow.
If you want to have $200 a month in cash flow on the property, then your mortgage payment needs to be under $800 a month.
The 50% rule is very much a guideline or “rule of thumb” and it's very conservative as well. I use it simply as a tool for quickly evaluating a property.
I just wanted to mention again that the importance of being able to analyze a property is so vital to your success in your real estate investing career. If you're someone that tells yourself that you're not good at math and you're not good at numbers you're going to have to ditch that story. There's only a couple simple calculations you need to learn and there's so much help along the way in terms of online calculators and spreadsheets..
I want you to be able to get comfortable with the numbers, and the 50% rule is a great place to start. I would recommend that you start analyzing a property every day if you can. Just look at the numbers, look at the gross rent, see if that would make sense.
You can use online mortgage calculators (For Canada use ratehub.ca, for the USA use zillow.com) to determine what a mortgage would be and just get comfortable doing this. The more you do it, the more comfortable you're going to get and the better able you'll be able to see a good investment when it comes across your desk and you’ll have the ability to know if it’s worth a closer look.