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Commercial Property Valuation Form - The Foursquare Church - foursquare

What's going on everyone? My name isBrandon with BiggerPockets.com authorof the Book on Rental Property Investingand the co-host of the BiggerPocketsPodcast and today I want to show you mysort of by hand strategy for analyzing arental property using what I call the"Foursquare Method." Now it's nothingrevolutionary it's just a way that Ipicture the analysis of aproperty so i can decide if a rentalproperty is worth buying or if I justwant to ignore. Maybe I want to find outwhat price makes a lot of sensethis is kind of analysis that I do ifI'm gonna do an analysis by hand, so I'mgoing to walk you guys through realquick and hopefully you get some goodideas out of itbe sure to add questions in the commentarea below this video if you have anyquestions and jump into BiggerPockets.comif you want to learn more aboutanalyzing rental properties or buyingrental properties. BiggerPockets.comis the real estate investingsocial network marketplace andinformation hub so we're here for youevery step of your journeyalright with that let's analyze the deal.I will say this as well if you enjoythis video if you think this is a goodhelpful video do me a favor give me athumbs up on this youtube video. It justhelps YouTube know that you're enjoyingit so you watch it let me know if youlike it and if you liked it thumbs up.Alright we're good.Alright I'm going to talk about thefoursquare method for analyzing a rentalproperty the numbers on a rentalproperty. So, to begin withI've got four boxes that i'm going totalk about and i'm going to talk abouteach one this one then this one thenthis one and then this one. We're goingto start talking about income now that'susually the easiest for people tounderstand sort of begin there so we canwrite this in the top "income."Alright, so once we've got this box labeledincome we want to figure out what goesin there so in this case the most commonrent or income you're going to get isgoing to be rental income i think mostpeople know that makes kind of sense,rental income. Now the other types ofincome as well for example there's likeif you have a laundry machine you canhave laundry income you can have astorage - amount of a storage shed on theproperty you might have something elseother miscellaneous income, but generallyspeaking rental income is going to be aprimary source of income and so whatwe're gonna do is we're gonna figure outhow much that is now today we're gonnaanalyze alocal property and it is a duplex seethe picture right here this is theproperty we're going to analyze togetherand this property is on the market we'regonna say for two hundred thousanddollars now your area might be cheapermore expensive for duplex don't worryabout it.This works better if you can buy a housefor three dollars and a pack of smokesor if you're gonna spend spend a milliondollars on a duplex it doesn't matterthe numbers all work the same way sowe're gonna say 200,000 or for thisproperty just FYI and it a is a duplexso each unit we're gonna say runs fourthousand dollars each so for the mathgeniuses out there a thousand dollars x2 equals two-thousand-dollar so we'regonna go ahead and type in here you knowwhat I mean another marker for thenumbers i think it'll make things alittle bit clearer maybe so for therental incomewe've got two thousand dollars per monthall right now don't mind my terriblehandwriting I'm doing my best here todayon the hand this is actually good forfor meso we've got our income rental income wedon't have on this property we're justgoing to assume we don't have anylaundrywe don't have any storage and rockinghaving miscellaneous so i'm gonna goahead and and say that our total incomefor this property so I'm going to saytotal monthly income is going to beequal to two thousand dollars per monthand i'm going to like kind of box thisoff so we know that this is a speciallittle area right here now we're donewith section one we're done with boxnumber one now we're gonna move on thebox number two and that is the expensesfor the property meaning the monthlyexpenses how much does it cost to ownthe property and here's where a lot ofinvestors people trying to buy rentalproperty mess up because they're tryingto buy property and they think it'sgonna be good deal they don't understandall the expenses and so I'm going to dowant to list them all out here so firstof all let's go ahead and label thisexpenses if you're wondering why thisbox is smaller than this box becausethere's a lot more expensive than incomeand so we want to have room for thatwe're going to listen to some of themost common ones now if you're brand newto this and you don't know what theseall are you can figure them out talk tolocal investors agents whatever or usethis list in fact i'm gonna go ahead andput together this entireher some document here for you in adownloadable spreadsheet that you canjust download today try it out see whatyou thinkjust got a bigger pockets dot-com /analyze rental property that's biggerpockets com such analyze rental propertyyou can download this entire foursquarea PDF that you can then fill in your ownto analyze your rental deal so let's goback to the switch but you can fill inon paper if you want later but for nowlet's go ahead and just list them herewe've got our taxes we also gotinsurance on the property now ensureensure and all right now we've got somehave tax insurance is incorporated inthe mortgage we'll talk about that alittle bit mortgage but for now withgoogle taxes insurance maybe thatutilities utilities and utilities ismade up of a number of things forexample can be made up of electricelectric commit of water sewer garbageand maybe gas building the most commonutilities for a property nownext we've got after that we've gotthings like HOA fees homeownersassociation fees if you happen to haveany over there you might have a lawncare law nor snow and then you're likelyalso going to have something known asvacancy they can see that means everymonth we want to set aside a little bitof money knowing that at some point it'sgoing to vacant and we'll talk about howmuch to do that there a second we gotour vacancywe've also got our repairs we've got ourwas called capital expenditures which weabbreviate as is like savingup for big things like you know every 20years you need a new roof so how muchdid you set aside every month for a newroof for new water heaters newappliances new carpet those big itemswant to set aside a little money everymonth for that and then lastly wellalmost lost that we've got our propertymanagementgo ahead and write that here propertyman image and then we've got very lastis our mortgage if you don't pay cashmore gamesalright so those are the most commonexpenses you're going to face now inyour area you might have a few otherones again talk to local investors seewhat kind of expenses they are facingbut these are the most common in my areaand most investors areas so now we'regoing to go through and we're gonnawrite down what the mountains for eachone of these so now each one of thesecan be figured out one of time so ifyou're not sure what the taxes go toyour tax assessor and find out whattaxes are if you're not sure whatinsurance will be talked to insurancebroker and so each one can be figuredout what time the more you do this themore general numbers you'll get tenunderstand so in this example of ourtwo-thousand-dollar property we're goingto assume that taxes are gonna run let'sjust say a hundred and fifty bucks amonth now maybe you live in an areawhere taxes are super cheap or maybeliving area where they're expensivedon't worry too much about it again thenumbers work about how you doing we gota hundred fifty dollars a month therenow insurance again that could differ alittle bit but i'm gonna go ahead andguess about a hundred dollars a month inthis property now utilities sometimestenant pays them sometimes the landlordpays in this case i want to say thatthis duplex with a you know a nicerduplex it's already been separated sowe're gonna have a tenant pay their ownelectricity their own water sewergarbage and gas going to pay all theirown utilities so for us as a landlordwe've got a zero dollar charge there nowthis property will say is not located inHOA area so we'll say zero dollars therewill even say that the tenant makesmaintain their online and their own snowremoval so we have to worry about thatthey can see though we have set somemoney aside for that every property iwant to set aside money now in myopinion I in my area my company we runabout a five or a little less than fivepercent bacon so usually like three orfour two three fourbut i like to go to have to estimatemaybe five percent now 5% of what we'retalking of the rental income so for thiscase if I took five percent of twothousand dollars we're looking at abouta hundred dollars a month now we'regoing to set aside just for the factthat someday the property's gonna sitvacant so next we've got repairs nowrepairs and are kind of linktogether because they're both aboutfixing the property up nowrepairs are more likely that you knowthe tenant damned put a hole in the wallor damage the the carpet little spot yougotta fix things rightcapex is replacing things so typicallywhat I like to do is I like to do youknow maybeagain it will depend on the quality ofthe property how new it is you know isthe roof already 20 years old we'regoing to replace that sooner so there'sa lot of factors go into it buttypically i like to see around maybe ahundred dollars a month for repairsmaybe fifty to a hundred per unit and soin this property I'm gonna go ahead andsay repairs are gonna be a hundred bucksa month and this is not an exact sciencethere's no way to really know that is a1 there there's no way to really knowbut we can make an educated guess thatabout a hundred dollars a month betweenthe two properties and capitalexpenditures on this propertyI'm going to also go ahead and estimateabout a hundred dollars a month so totaleach month were set aside a couplehundred bucks a month for those bigitems a lot of messages don't do thatbut i think i think it is a smart thingto do because those things do happenI mean imagine you about a rentalproperty and then 10 years down the roadyour cash phone a couple hundred bucks amonth making some good money coupleyears down the road but you know youhave to put a new roof on there goes 10years of income you just 10 years ofprofit loss caused you to put atwenty-thousand-dollar rough on you haveto save up for those things and so Imake sure it says that a little bit ofmoney for that next you got a propertymanagement now you can manage yourselfbut in this case I want to go ahead andassume that i'm going to manage have aproperty manager typically my areaproperty managers about ten percent ofthe rent so we'll stay tuned dollars amonth and lastly we have our mortgagenow that's not really a thing you canjust figure out your head usually butthere I million online mortgagecalculators in fact bigger pockets haswon a bigger pockets calms us biggerpockets com such calc CLC but you can goanywhere find a cheapI mean online free mortgage calculatorall over the place so in this case wheni plugged inyou know we said earlier that theproperty was atwo-hundred-thousand-dollar property nowwe have to make some assumptions herei'm gonna put down some money for a downpayment etc so let's just hypotheticallysay we're going to get a hundred andsixty thousand dollar mortgage if i put260,000 our mortgage at maybe fivepercent interest over a 30-year spanwhich is fairly typical in today's uh Iguess the interest rate economy we'relooking at about what is the 860 dollarsa month for a mortgage payment so atthis point we've got a list of most ofour expenses if not all of our expensesnow we're going to add all these uptogether we've got you know 869 106011 60 1260 1360 1460 1560 1610 is thatwhat you guys got hope so okay so at thebottom now with our total monthlyexpenses and only have room for it i'mgonna put here total monthly expensespardon my awkward standing here not usedto write on a whiteboard total monthlyexpenses of what we say 1610 put alittle box on that we want to call itimportantwhoo alright so we've now got our incomewe've now got our expenses now it's timeto move on the box number 34 box number3we're looking primarily at cash flowmeaning how much extra money do I haveevery month now this is usually prettyeasy to calculate once you've got box 1and box to finish the box 3 is going tobe your cash flow into know that all wewant to do is income minus expenses soour income on this property we alreadyknow let's go back to our red marker ourincome was two thousand dollars permonth or expenses was six 1610 and so tofigure out our actual monthly cash flowwe're just going to take this minus thisand we're left with that 390 dollars andthat is our total monthly cash flow i'mgoing to put a little box around thatbecause it's an important number sowe've now got income expenses cash flowbut the question is is 309 dollars agood amount of cash flow you can'tanswer that question it's kind of likeasking you know is I don't know peanutbutter the best color i don't think thathe doesn't really make sense because wedon't know anything about that number wedon't know what's around it we don'tknow how much money i mean did you put abillion dollars in just to make 390bucks or did you put two dollars downto make three ninety dollars so we haveto compare it to how much money we putinto it and that is called your cash oncash return on investment big wordcash-on-cash return is how we're goingto summarize that and that is a box foris for here so we're gonna writecash-on-cash are oh I return oninvestmentnow don't be complicated or don't getconfused by the kind of complicatedjargon hereall it means is is your money earningwhat kind of percentage of earning ifyou are stick a thousand dollars in thebank and then they paid you a hundreddollars this year that would be a10-percent cash-on-cash returnit's like what kind of return on yourcash flow are you getting so we're gonnahave to figure that out nownow that's a pretty easy thing to figureout but we have to first determine howmuch money we put into a deal that's thefirst thing we do when we want to lookat return we don't know how much moneywe put into it so to do that we're goingto add up all the money we put into thisso we're going to start with our downpayment and what else would we have topay when we buy property with maybe doclosing costs so closing costswhat else maybe I repair money or rehabbudget but shit so we have a downpaymentclosing calculator repairs and maybesome miscellaneous tools andmiscellaneous other who knows maybe youin the process I don't know maybe youwant towho knows whatever appraisals whateverbut that's kind of part of closing housebut either way when you buy propertythat a lot of areas you might spendmoney on to get it so we're gonna addall those up together in to get ourtotal total investmentalright so our down payment in this caseearlier we talked about the property waslisted at 204 two hundred thousanddollars so if we bought it for 200,000and we put eight will say twenty percentdown payment twenty percent of 200,000is 40,000 so a down payment may switchto the red marker 40 thousand dollarsfor down payment now we also closingcosts to buy the property we bought itto pay the realthere are not alter the the titlecompany or the attorney way to pay foran appraisal to pay for loan documentsand loan fees and all that so we'll sayclosing costs in this case was $3,000now maybe it's more maybe less in yourarea depending on your loan in your areabut will say three thousand dollars andlet's just for simplicity when we boughtthe property we want to repaint theoutside maybe want to make it look alittle nicer so we're gonna say howabout seven thousand dollars for a rehabso again I think that's usually paintingthe property or doing whatever so inthis case our hypothetical property herewe spent forty thousand a downpayment30,000 closing costs seven thousandrehab and I'm gonna leave this one blankwill say zero dollars and miscellaneousother but adding them all up our totalinvestment was at this point$50,000 we've invested fifty thousanddollars so and here's where we're goingto figure out our total cash on cash ryto figure that out we want to take ourannual cash flow which we already wellwe know our monthly cash flow so we'regoing to take our monthly cash flow 390multiply that by twelve and we're goingto get I did that calculation earlier4680 4680 dollars so we got 4680 dollarsin annual cash flow and now we're goingto divide that sowed to figure out yourcash on cash return we're simply goingto take our annual annual cash flow andwe're going / our total investment soannual cash flow we already know was4003 of 4,000 troops 680 dollars dividedthat by our total investment which wealready figured out right here 50001 weleft within this case 4680 by 50,000 trustycalculator works out to a nine pointthree six percent actually comes out atpoint zero 936 but we want to make apercentage we just multiply by a hundredit and add the % so we're left with a9.3 600rr cash-on-cash ROI is equal tonine point three six percent so that ishow we analyze a deal using thefoursquare method we got four boxes onetwo three and four to figure our incomeexpenses are cash flow and ourcash-on-cash roi now the questionbecomes and all of you are wondering isa 9.3 6% cash-on-cash return good nowthis is going to get a little bit trickyand we could talk for hours on this butthis is really going to depend on yourgoals your strategy what you're tryingto do and what other investments you canhave for example let's say you can stickyour money in the stock market today andknow that you can make twenty percentnow I that's doubtful but let's just sayyou could do that right then ninedoesn't sound very good but let's sayyou're earning two percent on yourstocks over the past 10 yearswell then maybe there's a fantasticreturn in fact over the last likehundred years the stock market's beenlike six seven percent average so thisactually does a little better than thatso if i was comparing between this andput it into the you know SMP 500 i mightchoose this over that now another thingwe did not talk about today we can onlydo it with this method and gets a lotmore complicated by hand and that isyour overall return or even morecomplicated your internal rate of returnwhat those numbers do is they go a lotdeeper into well are you building equityfor example let's just say that thisproperty we bought everything worked outfine we won't got the numbers we came upwith a nine point three six percentcash-on-cash return what if thatproperty wasn't worth 200 thousanddollarswhat if we got an amazing deal and inreality all the other duplex in the areawere selling for a million dollars imean let's be crazy a million-dollar sowe can turn around tomorrow and sellthis property for a million buckswell now this deal looks a whole lotbetter right because although our cashon cash return meaning the return oninvestment from our cash flowalthough that is 9.36 percent we've gota ton of equity that we can sell theproperty and make a ton almost likewe're flipping it right and socash-on-cash is just one aspect to lookat if you have a proudwith a ton of equity that could beanother thing and for that i like tolook at your total return so let's sayafter five years if the property went upin value three percent per year and wesold it and weep a realtor fees how muchwould we get how does that turn out toan overall return that is the numberthat I care a lot about and that'ssomething that we're not going to beable to do by hand very easilyyou might spend a half hour 45 minutesto an hour figuring all that out so whatI recommend instead if you guys areinterested in learning more aboutanalyzing deals jump ontoBiggerPockets.com/AnalysisBiggerPockets.com/analysis - now this this what thatsite is it's the home of a BiggerPockets rental property calculatorhousekeeping calculator a boroughcalculator which is a kind of cool thingyou can go look up and then the wholeseven calculator what these calculatorsdo is they let you to basically doingthis process but they do it in a muchmore organized manner just four simplepages almost like your page for in yourdetails you have to pay for income andexpensesyou're basically entering all thisnumber in but then it's also going toask you a few questions like what do youthink the future is going to look likewhat kind of returns you want lookingfor what kind of appreciation we expectin the futurewhat do we think the property's worthtoday and then you can edit the thefinal results of that you can see likethis PDF document that shows you what'sgonna look like next year the year afteryear after you get some really goodestimates for the future including totalreturns i highly recommend digging intothose calculators you can get to myBiggerPockets.com/Analysis sothe last thing I'll say about analyzingproperties every single week everysingle week now on BiggerPockets I hosta live webinar a live class kinda likethis come from using a computer andsitting down and being lazy and uh Iteach different aspect of real estatesome time talking about buying duplexessometimes i'm talking about flippinghouses sometimes talking about analyzingdeals finding deals all that kind ofstuff and so I do that every single weekthey're completely free to attend aliveand so I want to encourage you guys toshow upsignup BiggerPockets.com such webinarand the reason I invite you that isbecause every single week we analyze thedeal together cuz i think this analysisprocess is so important to every week wediddo a property a real-life property veryspecific when we find it on the MLStogether or on the market we find it andwe look at it we analyze that we figureout where it's worth buying where it'snot worth buying and we have a lot offun doing this again you can sign up forthat BiggerPockets.com/webinarand i hope to see you at one of theBiggerPockets webinars so I thinkthat's a that's about it for now if youguys have any questions like I said jumpinto the comment section of this page Iask your questions and if you know theanswer please jump in and answerquestions as well I can't get to all ofthem so be sure to counteract people andlike I said check out BiggerPockets.com/Analysis to dig into the propertyanalysis tools on a BiggerPockets.comSo, hopefully you guys have a goodindication our understanding now how toanalyze for cash flow and cash on cashreturn how to do the numbers on a rentalproperty i will see you around theBiggerPockets community I'll see you on theBiggerPockets Podcast on BiggerPocketswebinars maybe just hanging out in theforums for BiggerPockets.com my nameis Brandon signing off.