\n<\/p>\n
Don\u2019t know how to analyze a rental property<\/strong><\/a>? After this episode, you\u2019ll be a rental property analysis pro, knowing exactly how much money you\u2019ll make on your <\/strong>first, second, or next real estate investment<\/strong>. But don\u2019t worry; you won\u2019t need any complex formulas, dense spreadsheets, or complicated math to calculate how much cash flow you\u2019ll collect from your real estate deal. Instead, you can use the EXACT methods we show to analyze investment properties in minutes<\/strong>, EVEN if you\u2019re a real estate rookie!<\/p>\n Wait? Did David and Rob morph into the queen of upstate real estate, Ashley Kehr<\/strong>, and short-term rental\/skincare expert, Tony Robinson<\/strong>? Fortunately, David and Rob are safe and sound, and in this episode, Ashley and Tony from the Real Estate Rookie<\/em><\/strong><\/a> podcast <\/strong>will teach you EXACTLY how to analyze real estate deals in 2023<\/strong>. From long-term <\/strong>to short-term rentals<\/strong>, BRRRR<\/strong><\/a> properties, and choosing your real estate market<\/strong>, Ashley and Tony will go through everything you need to ensure your first or next real estate deal is a home run.<\/p>\n Our hosts will go step-by-step through analyzing a real estate investing market<\/strong>, signs of one you should invest in, building your \u201cbuy box,\u201d <\/strong>analyzing a long-term, short-term, and BRRRR investment property, and how the 2023 housing market<\/strong> has changed. If you\u2019re still waiting to get a rental property under contract<\/strong>, this is the place to start!<\/p>\n Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: \u00a0<\/p>\n \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is Real Estate Rook\u2026 Oh wait, Tony, this is a takeover. We\u2019re on the Real Estate podcast, episode number 793.<\/p>\n
Before you even think about your market, think about what your goals are as a real estate investor. If your goal is to leave your job as fast as humanly possible, appreciation itself isn\u2019t really going to help you. Tax benefits per se aren\u2019t really going to help you as much, right? You want cash flow, you want profits. I think, think about what your goal is, what your strategy is, and that kind of helps you identify what market you should be going into, what strategy you should be going into.<\/p>\n
My name is Ashley Kehr, and I\u2019m here with my co-host, Tony Robinson.<\/p>\n
And we\u2019re super excited to be taking over the feed today because Ash and I feel like we\u2019re getting called to the big leagues a little bit. But I guess we can start with a little quick tip or I think David Greene does it with a Batman voice. Now he goes like, \u201cQuick tip,\u201d or something like that.
Anyway, quick tip for today. If you guys aren\u2019t yet aware, BiggerPockets has a bunch of free resources and premium resources as well, but you can sign up for free at BiggerPockets and you get five calculator uses to help you analyze deals, which ties in perfectly with today\u2019s episode about deal analysis. And if you\u2019re a premium member, if you\u2019re a BiggerPockets Pro member, you get unlimited calculator uses. So make sure to check those out.
And then I guess as the second quick tip, for those of you that don\u2019t know me and Ashley, make sure to connect with us on social. I\u2019m @tonyjrobinson on Instagram. She\u2019s @wealthfromrentals. If you guys want to keep up with us after this podcast episode ends.<\/p>\n
And we are the co-hosts of the Real Estate Rookie podcast. So if you want to get back to basics and fundamentals and build that strong foundation for real estate investing, then make sure you check out our podcast or send some of your friends, family, colleagues over to the Real Estate Rookie. We really focus on beginners investing and really getting that first deal and working up to your next deal.
We have a lot of guests that have less than 10 deals on, and they\u2019re so fresh in being a rookie investor that they are a wealth of knowledge as to how they\u2019ve overcome their mindset, how they\u2019ve taken action, what are the exact steps they took to get to their first deal. If you know somebody who could take advantage of listening to our podcast and give them that little bit of inspiration and motivation they need to get their first real estate deal, please send them over to the Real Estate Rookie.
We\u2019re also on YouTube at Real Estate Rookie, and we are going to do a screen share when we do a deal analysis for you guys. And if you are more of a visual learner and you would love to look at the actual calculator reports that we\u2019re sharing for you guys, go on over to YouTube, Real Estate Rookie on YouTube, BiggerPockets on YouTube, and you\u2019ll be able to watch this video and learn along with us.
So Tony, let\u2019s get into some deal analysis.<\/p>\n
I\u2019m super excited to talk about this because I feel like it\u2019s honestly one of the most important things that people need to understand as they\u2019re getting into their real estate journey, but it\u2019s probably a set that most people don\u2019t spend enough time really getting good at. So I\u2019m excited to dive into today\u2019s content.<\/p>\n
I think that it can change too. Just because you\u2019re an expert at analyzing a single family property does not mean that you\u2019re also an expert at analyzing a duplex. There are so many different things compared to the property type of what you are analyzing, but also market specific too. For example, if you\u2019re in Florida, you may have to account for hurricane insurance. If you\u2019re in a flood zone, you may have to account for flood insurance depending what the city taxes are.
For a short-term rental, you may have to account for some kind of permit to actually operate a short-term rental. There\u2019s a lot of different things that are specific to your market, to your property when it comes to analyzing a deal. And our best advice I would say to a rookie investor is stick to one market and stick to one property type and get really, really good at analyzing that one specific niche and then go out and branch out and analyze other deals in other markets and things like that.
As much as we would love to analyze deals for you guys all very specifically and tell you exactly how to analyze the deal in your neighborhood, we are going to do some examples of what we are currently investing in. Tony has a flip property that he\u2019s going to talk about how he analyzes it, and then I\u2019m going to talk about a single family house and how to analyze it in one of the markets I invest in.
First, Tony, before we actually get into the deals, do you want to do a breakdown of the process of analyzing a deal?<\/p>\n
Yeah, absolutely. And I think before I even talk about the process, Ash, I want to share with all of the listeners that you don\u2019t necessarily have to be a \u201cnumbers person\u201d to get good at analyzing deals as a real estate investor. The beautiful thing here is that regardless of how tech savvy or Excel savvy you are. If you hated math in high school or whatever it is, you can still get good at analyzing properties as a short-term rental, as a flip, as BRRRRs, whatever it is because there\u2019s a proven set of steps you need to follow.
As long as you can follow directions, you should be able to get at least decent at analyzing properties with whatever strategy it is that you\u2019re using. And even if you don\u2019t like using Excel, that\u2019s a totally free tool, but BiggerPockets obviously has a bunch of calculators that you can use to help automate this process as well. As long as you can punch numbers on your keypad, on your keyboard, then you should be able to analyze deals as well.
I just want to start with that first. That\u2019s the important thing. I want you guys to understand that regardless of whether you\u2019re a freak in the spreadsheets or maybe not, you can still get good at this. I lost my train of thought. What the heck did you ask me to do before I went off on to that tangent?<\/p>\n
I didn\u2019t ask you to do anything, so that was perfect, Tony. But I wanted to talk about what are some of the steps in analyzing a deal, some of the things you should think about before actually getting into the numbers. The first thing is where are you going to invest in and doing the market analysis of figuring out if this is actually an area that\u2019s going to benefit your why for investing in real estate.
If you\u2019re somebody who\u2019s maybe looking for long-term play, you don\u2019t really need cash flow right now. You love your job, you want to stay in your W-2, but you don\u2019t have any retirement maybe set up. And so you want properties that are going to appreciate so you can tap into that equity down the road and you can pull that out for your retirement. In that scenario, maybe a market with minimal cash flow, but high chance of appreciation is going to be a better play for you than somebody that was like, \u201cI want to get out of my job now, so I need cash flow right now. I need high cash flow. I don\u2019t care that much about appreciation because I want money now.\u201d
And then there\u2019s people who care about both. They want both of those things. Definitely picking your market is one of the first steps and really focusing in and honing on that because markets are so different that it will make you lose focus if you are trying to analyze deals in five different markets across the country. As a new investor or even as an experienced investor, don\u2019t try and go to 10 different markets at once. Get really good at one market for whatever strategy you\u2019re doing. Then branch out and use your skillset to continuously to analyze markets and then go into those points.<\/p>\n
I think even, I love what you just said. I think it\u2019s a super important point, but I think even taking one step back, and this kind of ties into what you said initially. But before you even think about your market, think about what your goals are as a real estate investor because that\u2019s going to play a big factor in how you make some of those subsequent decisions.
You talked, Ash, about are you focused on cash flow today or you focused on tax benefit? If your goal is to leave your job as fast as humanly possible, then appreciation itself isn\u2019t really going to help you today. Appreciation is a long-term play. If your goal is to quit your job today, tax benefits per se aren\u2019t really going to help you as much. You want cash flow, you want profits.
I think, think about what your goal is, what your strategy is, and that kind of helps you identify what market you should be going into, what strategy you should be going into because you got to identify which one supports your goal. Because we are in a very fortunate position, Ash, where we get to talk to people from all different walks of life, different stages of their real estate investing career. And I hear some folks who say, \u201cTony\u2026\u201d Actually Ash, we were in Denver just a couple of weeks ago and we were sitting with Nev, who\u2019s a doctor. Nev actually we met at BPCON last year and he won this raffle to hang out with me, Ash, for a day at BiggerPockets headquarters and Nev is a doctor.
And obviously, doctors have high incomes and a big goal for Nev was, \u201cOkay, how do I offset my W-2 income with the passive losses that real estate can provide?\u201d A lot of his real estate investing strategy was focused on that piece. As he\u2019s looking for properties, he\u2019s not going to necessarily be able to look in markets where price points and land value and property value are super low because that doesn\u2019t support his goal of getting the cost benefits.
He\u2019s going to have to go into markets where the property values are a little bit higher and he can get the benefit of a cost segregation study. Whereas, say someone who said, \u201cI want to quit my job tomorrow,\u201d they\u2019ve got to go out and focus, \u201cWhere can I get maybe some good BRRRR deals? Where can I get good cash flow with minimal cash outlay?\u201d I think a lot of that kind of ties into it.
But Ash, once you\u2019ve kind of decided on a market, and I think both of you and I are unique in this approach because we kind of had different approaches to this. But when you started to narrow down on your market, are there any indicators you\u2019re looking for inside of that market to say, \u201cOkay, yes, this is a good place for me to start analyzing deals\u201d?<\/p>\n
Yes. I started out just close to home because this was the market I knew because I grew up there, and I also worked for another investor and I knew the market. There\u2019s been two times that I\u2019ve kind of went out of my comfort zone into the city, not the rural areas. And those were both on a real estate agent\u2019s recommendation and actually the same one. And so I would listen to everything that she said about those neighborhoods, and then I went and did my own research to verify that.
Some of the tools I use for that are NeighborhoodScouts and then also BrightInvestor. Those are two pieces of software where you can pull up so much market data that I used to go to citydata.org and all these different websites to find everything that I wanted, a crime website. But now there\u2019s so many programs that have it all tied together that save you so much time and have all the information you need.
BrightInvestor is a newer one, but you can go on there and just pull all of the data that you need to analyze a market. They basically do all the work for you. And that is where I\u2019m looking at, okay, what is the job growth as to what has been in the last couple of years and what is the potential? Then I\u2019m also looking at the population growth. Are people moving there? Are they moving away from there?
I\u2019m also looking at what are the demographics as far as age? And if you see there\u2019s a lot of kids, it\u2019s more of a family neighborhood where if I\u2019m looking at a five-bedroom house, I may not want to go into an area that has a lot of single people, that are unmarried, maybe thirty to forties where maybe they\u2019re out of that period where they\u2019re in their twenties and don\u2019t want to live with roommates.
But so just looking at all these different variables that come into play when looking at the market, but then also what\u2019s the price-to-rent ratio? What\u2019s the average cost of living? What is the average income, all of these different things that you can pull and look at the market. And then you have to take all of that information and tie it into your investing strategy.
If I\u2019m analyzing for a short-term rental, it\u2019s going to be very different data and stats that I want from that market analysis compared to if I\u2019m looking for a long-term buy and hold play in this market.<\/p>\n
So many good points there, Ash, but one thing I want to call out that I thought was super important, you said you started off kind of investing in your backyard because that\u2019s what you knew, but you also supported that decision with data. And I think that\u2019s the step that a lot of people missed. There\u2019s nothing wrong with saying, I know this market so I\u2019m going to invest here because I\u2019m comfortable, I\u2019m familiar with it. But you have to take it one step further and make sure that it actually makes sense to invest in that market.
A lot of what we do is in the short-term rental space, and I\u2019ve seen some folks get just absolutely hammered on deals because they invested in markets that they knew, but they didn\u2019t take that secondary step of supporting that decision with data. They said, \u201cI love going to Maui, so I\u2019m going to buy a condo in Maui.\u201d \u201cI love vacationing at the beaches in Florida, so I\u2019m going to buy a beachfront property in Florida.\u201d \u201cI love going to\u2026\u201d Name the place, name the state, and they say, I like going there, therefore it must be a good investment. But that is not true whatsoever.
You can use that as your first step, but you still want to make sure that you take that secondary step of supporting it with data. And I think what you talked about, Ash, about using those websites is a kind of great place to go. And again, obviously the strategy that you use is also going to dictate some of the data that you need to pull. We\u2019ll talk a little bit about the flips and short-term rentals that we do, but I want to make sure that the data specific to the asset class that I\u2019m focusing on, to the strategy that I\u2019m focusing on, supports that next step there.
When I think a little bit, Ash, about where people get hung up on analyzing deals, first, I think is where to pull the data from. And I think you gave some great resources there. BiggerPockets actually, as you\u2019re going through the calculator tools, they also kind of give you hints on where you can pull some of this information.
If you guys go to BiggerPockets, look at the tools, find the calculator for whatever strategy it is trying to use, I think that\u2019s a great starting point to help you get over that initial hump of what data do I need and where should I be pulling that data because BP literally guides you through that process.
I think the second thing that people get caught up on is how do I know if I\u2019m doing it the right way? How do I know if I\u2019m missing anything? Because you see a lot of investors who, let\u2019s say a long-term rental, for example. They might understand, okay, cool, here\u2019s a property that I\u2019m looking at purchasing. Here\u2019s a comparable property for rent. Maybe it\u2019s renting forward, whatever, 2,000 bucks a month, but they forget that they need to include things like CapEx or maintenance and repairs.
Again, I think if you use a tool that is built to help kind of fill in some of those gaps, it becomes easier to have confidence that you\u2019re going through those steps. Literally the first deal that I ever analyzed, actually the first multiple deals I ever analyzed, I did them all with the BP calculators because you can\u2019t move forward without filling in all of that required information. I felt like it was super helpful for me.<\/p>\n
Tony, let\u2019s run on to now the actual deal, what your investment strategy is. You\u2019ve kind of got your market analysis, you know where you\u2019re pulling your data from, but you have to pull the data for the actual property too, such as what are the property taxes? How do I estimate insurance? Are there any zoning requirements I need to know about? Are short-term rentals allowed here? What are the rules and regulations of the city?
Pulling all of that information, that can actually be a bit of legwork if you\u2019ve never invested in that market before or you don\u2019t really know anything about it. When you\u2019re doing the actual deal analysis, you want to know what strategy you\u2019re going for. You want to have your buy box with your property type, your strategy. Are there definite no\u2019s for you? I don\u2019t want a house with a pool.
And one of the reasons may be because your insurance premium may be higher if you have a pool and you have renters in the place. Going through your buy box, what is your max purchase price that you are looking to buy at in that market? Going through making this list will definitely help you expedite analyzing deals because you can go through and go ahead and just check like, \u201cNope, this property did not meet this criteria,\u201d or, \u201cYes, it does.\u201d \u201cYes, it does.\u201d \u201cYes, it does.\u201d Okay, now I\u2019m actually going to dive deeper into the analysis part of the deal.
And one thing with doing that is like you also stay focused and you stay specific on what you\u2019re trying to do. And one thing I will go over in the deal that I analyze for you guys is that I\u2019m focused on one strategy, but with how the way the market is, I am also analyzing deals based on a second strategy as almost an exit strategy. If my first strategy isn\u2019t going to work, how else can I make that property work?
And a lot of people ran into that as our friend, Tyler Madden, who\u2019s been on the podcast several times, and we just had his wife Zosia on, on episode 301. They purchased a property as a short-term rental. After closing on the property, they found out that where the property was located, you could not do short-term rentals and they had to transition and pivot their strategy to medium-term rentals. And it actually ended up working out great for them.
But being cautious of, if you have a different strategy so that if you are maybe wrong in running your numbers as to what that backup exit plan can be, and maybe it\u2019s selling it, maybe turning it in medium term rental, whatever that is, that you have some kind of backup in place in case that first strategy doesn\u2019t end up working out the way that you want it to. And it\u2019s almost like having a safety net.<\/p>\n
I just want to highlight really quickly, Ash, you talked about the buy box and just to clarify that for folks that maybe aren\u2019t familiar with that phrase. Again, your buy box is basically just you identifying what type of property am I comfortable purchasing that aligns with my chosen strategy and with my chosen goal, what I\u2019m trying to get out of this.
It\u2019s like I can tell you for us, if we\u2019re flipping a home in Joshua Tree, we\u2019re typically looking for something that\u2019s about three bedrooms, usually one to two bathrooms, 1,100 to 1,300 square feet, built sometime around 2000 to maybe 2010 at the latest because we know inside of that little box, pretty much down to the penny how much we\u2019re going to spend to renovate something like that. We know that we can get in and get out. We can finish a rehab in six weeks on that kind of product, and it\u2019s something that we\u2019ve done multiple times.
However, when you\u2019re first starting, it\u2019s not always easy to really know what your buy box is, and sometimes you kind of just got to use the data that\u2019s available and make your best judgment. I can, on the short-term rental side, when we first started looking, we looked at all the data for that specific market and we compared revenues by bedroom size.
Typically, when you\u2019re analyzing short-term rentals, you kind of separate it by bedroom count. And we looked at five bedrooms, four bedrooms, three bedrooms, two\u2019s, one, studios. And we said, okay, we think the best return is here, the four or five-bedroom for this specific city. As we started to look for deals, we said no to anything that wasn\u2019t a four or five-bedroom initially, and all of our acquisition efforts were focused on four and five-bedrooms because we felt that was what made the most sense. And then as we started to get more comfortable and familiar in that market, we started to identify how smaller properties could play a role in our portfolio as well. We started to open that buy box up a little bit.
I think what\u2019s most important is just creating that buy box so that you can get really good at analyzing something specific. Because like Ashley mentioned earlier, it\u2019s easier to become an expert at analyzing five bedrooms in this zip code with this type of construction style than it is to analyze everything in an entire county. I think part of the buy box, part of the reason why it\u2019s so important is to help give you that confidence as you\u2019re analyzing deals.<\/p>\n
The next thing after knowing what your market is, what kind of deal you\u2019re looking for is how are you going to pay for the deal? There\u2019s often the phrase heard that if you find a deal, the money will come because it\u2019s a deal and everybody will want to be a piece of that opportunity. But it is way less stressful if you have a plan in place as to how you\u2019re going to fund a deal before you actually have it. Instead of running around like a chicken, your head cut off trying to find a private moneylender, hard moneylender after you have the deal locked up and you have 72 hours to get funding secure, so figuring out how you\u2019re going to fund a deal.
Right now my main sources for funding a deal are my lines of credit that I have using cash, my own cash for rehabs. And then also I have a private moneylender that I use for a lot of deals. And then for my refinances, I\u2019m doing a lot of them on the commercial side of lending, and I did one recently on the residential side. But that\u2019s kind of how I\u2019m funding my deals. I\u2019m not really doing any purchases that are mortgages right at the beginning that I\u2019m usually doing the lines of credit or the cash. Last year, I did do three properties that were purchased with hard money, and right now it is way more cost-effective for me to just use my lines of credit to fund the deals.<\/p>\n
Yeah, I\u2019d say the vast majority of what\u2019s in our portfolio, both on our holds and our flips have been funded with private capital, private money in some way, shape or form. Every single flip we\u2019ve done has been fully funded with private money. We haven\u2019t used any hard money yet. The majority of our properties that are in our short-term rental portfolio kind of re-BRRRR them, or we bought them initially with private money and then we refiled into long-term debt, or we brought in partners who carried the initial mortgage. But for us, and I think because we built a little bit of a track record, it\u2019s been a good method and a win-win situation for us and that person to leverage private money.
Now, I know a lot of folks might be thinking, duh, you guys are Tony and Ashley BiggerPockets co-host, and you guys have these big platforms, so easy for you guys to raise private capital. But I can tell you, I know people that are not podcast hosts that don\u2019t have tens of thousands of followers on social media that are still leveraging private capital to fund the majority of their deals. And Ash and I have talked to folks on the Rookie podcast who did it on their first deal with no track record whatsoever.
If you\u2019re wondering, man, where are all these people hiding that just have money to give to us investors? You got to start building your network out and that\u2019s attending local meetups, hosting your own meetup. There\u2019s a lot of benefit that comes from that, but I think the more hands you can shake, the more ways you can provide value to other people, the easier it\u2019ll be for you to find that potential private moneylender for your own deals as well.<\/p>\n
And the private moneylenders that I use were all before the podcast. I didn\u2019t meet any of them through being on BiggerPockets or through the podcast. They were all private lenders before I actually started on the podcast. Definitely, and there there\u2019s a lot of great Instagram accounts that share how to reach out to private moneylenders. Soli, @lattesandleases, she does a really great job of explaining in social media posts how she has approached private moneylenders, how she does a pitch deck to them per se, as to what the deal is, what\u2019s it about, and how they can lend on the deal. That\u2019s one of the best ones that I\u2019ve seen.<\/p>\n
Yeah, I also got a shout-out, Amy Mahjoory. She\u2019s Amy, @amymahjoory on Instagram, and she also creates a lot of great content specifically about raising private capital for your real estate transactions.<\/p>\n
Do you want to do one of our deals?<\/p>\n
Yeah, let\u2019s do it. Let\u2019s do it.<\/p>\n
Do you want me to go first?<\/p>\n
Yeah, if you\u2019re volunteering to tribute, let\u2019s do it. Have you seen that movie? Have you seen Hunger Games?<\/p>\n
Yeah, yeah, yeah. Actually, I read the books and then I saw the movies.<\/p>\n
Ooh, excuse me, I-have-read-the-books-first era.<\/p>\n
Sometimes I got to talk about that nerdy side of me. I\u2019m going to actually going to do a screen share. If you guys are listening to this in the car, wherever you are, go back and find it on YouTube so you can actually watch the screen as I\u2019m going through it. I will do my best to be as visual as I can with my words, but when I speak or write, I am definitely a lot more analytical than visual in storytelling. I\u2019ll do my best, but I\u2019m going to do a screen share here.
First, I just want to share with you guys some of the data that I pulled on this market because this is my first time going into this neighborhood. This is a neighborhood of Buffalo, New York. How this deal came about in one important aspect of getting a deal done is actually sourcing deals. And so I got a text from my real estate agent that I\u2019ve used for quite a few of my deals. She did my first property back in 2013. We\u2019ve had a good standing relationship and she text me and said, \u201cAshley, I thought of you. I just walked this house, you got to come see it. It\u2019s in an amazing area. Can you come tomorrow?\u201d Or something like that.
I went and looked at it.<\/p>\n
And Ash, I just want to confirm, so this was on market?<\/p>\n
No, this was not on market. In what the real estate agent was doing was in their office, they kind of will sometimes put their heads together and help comp a listing as to what it should be priced at. Agents will take other agents on tours of properties that they have that are coming up to, one, help them price it, get their thoughts on it. Second, to have it almost as a pocket listing to see if they can sell it before it even goes on the MLS.
This was considered a pocket listing where it was not listed yet. The person that lived in the property had passed away and it was now going to his estate and there was a trustee of estate who just wanted to sell it. My agent had gone through with the seller\u2019s agent, and so I got into the property the next day, I met her there and the seller\u2019s agent. I always, always love when the seller\u2019s agent is at the property because they know so much more about the property, about why the seller is selling than my agent does because my agent is just walking in the door with me, and all they have is kind of what\u2019s going to be on the MLS. But this wasn\u2019t even on the MLS yet to have any information about it.
We went through the property with them. In this neighborhood, I didn\u2019t know anything about it. It was great that we drove, we walked around, everything like that to kind of get a visual. The seller\u2019s agent knew a lot about the area and told me all this stuff. It sounds great coming from the two agents, but then again, you have to verify. I went and looked at the areas where there was a lot of gentrification, a lot of revitalization in the surrounding streets because in Buffalo and along with a lot of cities, it can vary street by street.
South Buffalo, I have several investments in, and I can tell you the exact\u2026 I could draw out on a map the exact shape of where exactly I want to be in South Buffalo. And for this part of Buffalo, I didn\u2019t know any of that.
Going on Google Maps and doing the walkthrough where you can actually take your little yellow guy and walk the streets if you can\u2019t physically be there or going to the property. Here\u2019s just a couple examples of the data that I pulled. Right here looking at a three-year forecast, so right here this, then kind of the top column got cut off here, but where you\u2019re seeing a 10 on the top for the three-year forecast. So 1 to 10, 10 being the best as far as appreciation in homes in that area that they\u2019re going to see, they think that over the next three years, this property will appreciate 18%.
Over the next year, it\u2019ll be about 6%. That is considered a 10 rating compared to all of Buffalo. Compared to the nation, it is a seven rating, which is still actually pretty good. And then it goes on to talk about the latest quarter where it actually went down from Q4 2022 to Q1 to 2023, which I saw all over our state as to just a drop in prices. But then once spring hit, everything shot right back up again and everything\u2019s going over listing, everything is being sold within a couple of days or gone pending within a couple of days.
Then another stat that I pulled here too, as to the population growth. There is actually a little orange warning symbol by this. It says within half a mile from the location, the population is changed 11%, and I believe this was within the last five years, so 11% increase. And when I had clicked on that little orange thing, it said this is higher. It was either higher or on average with the nation. I think it was higher than what the national average is for population growth.
Right there, those are two things that look really intriguing to me about this neighborhood, and I actually did it very, very niche down as to this is only a three-block radius right now that I\u2019m looking in as far as comparing this neighborhood.
Now I\u2019m going to take you guys to the actual BiggerPockets report that I pulled. This is using the rental calculator report. This property that I looked at, it doesn\u2019t need really any rehab, maybe a couple of cosmetic things and just like the yard cleaned up, lots of garden gnomes, things like that. This property, if I\u2019m going to rent it out as a single family home, I don\u2019t have to do any rehab. I\u2019m going to be able to list it for $1,300 per month.
It is a five-bedroom house with one and a half bath. One thing that I am really looking at right now, and I\u2019m finding this to my advantage, and I\u2019ve started looking at this because the market is competitive right now, the market has changed as to what it was two years ago. And this is probably something I will carry forward forever though, is looking at unique properties or things that are not apparent. This property is a single family home, but it is actually zoned as a two-family home, as a duplex, and it does have separate meters on there for electric.<\/p>\n
Let me ask one thing because I think that\u2019s an important thing to call out. How did you identify that? If I\u2019m a new investor, how do I figure out if the actual usage of this property matches with what it\u2019s zoned for?<\/p>\n
You can go to PropStream and usually, they\u2019ll have that data on there as to what the zoning is. You can go to the GIS mapping system for the county. One red flag for me to trigger looking into this was that there was the two meters on the side of the house. But if this was listed on the MLS, it would be listed as a single family home.
If this property were to get to the point where it was listed, then it would be listed as a single family and there would be people who were looking for multifamily just automatically passing by this listing. The only things that need to be done to actually make this back into a two-unit would to be put up a wall where the stairs go to the upstairs, which is very cost effective and not hard to do. And then in the bathroom, add the shower back in. The shower room is taken out, which again, it\u2019s not that difficult of a thing to do. There\u2019s a basement, the plumbing all runs right under the bathroom. You just hook up a new drain and you put your shower in.
Those are the two things that you would need to do. For my example, I ran the property as a single family home. As a single family home, we kind of talked about, Tony, with you for short-term rentals comparing like bedroom count. You\u2019re going to get more for a four-bedroom than a three-bedroom, but not as much for a five-bedroom or whatever your example was. The same may go with a long-term rental where there just isn\u2019t enough income to support what you could charge for a five-bedroom.
For example, a three-bedroom house and a five-bedroom house might just only be $50 more just because nobody living in that neighborhood can pay more than $1,300 a month. I ran this property as a single family home and it ended up being -$45 in cash flow, with a -1.65% cash-on-cash return. And when I did this, I ran it with even putting 20% down on the property and just getting a conventional 30-year fixed rate loan on the property.
But let\u2019s go through some of the expenses. Well, first the rent, I found that by going to the BiggerPockets rent estimator and putting in the address of the property and it pulling up comparables. Then I also went to Zillow rent and I looked at what is currently listed. Then I also went to Facebook Marketplace and looked at what is currently listed in that area for rent. And I use those three metrics to kind of come at the point that $1,300 is a very conservative number that I could get for rent for this property as a single family home. It also has a large backyard and it has a driveway, which not a lot of the other properties in the neighborhood have that.
Then I went and pulled the taxes. I pulled the taxes. I never go with the MLS listing and what it says. And even though this property wasn\u2019t listed on there, I always verify myself. No matter the source, no matter who\u2019s telling me, I always verify what the property taxes are. I went to the Buffalo ORS website. I went to the Erie County GIS mapping website, and I was able to pull the property taxes off of there and get the copy of the tax bills.
The next thing is insurance. So insurance, I\u2019ve gotten good at estimating just because of knowing properties in this area and what I currently pay on a single family or what I currently pay on a duplex right now. If you really want to hone in on your insurance is to actually go to a broker and get a quote and just ask them. Quotes are free to get. And yes, an insurance broker is going to get annoyed with you if every deal you analyze, you keep asking them for a quote, and you don\u2019t actually buy these properties and they\u2019re having to do all these quotes for you. But at least if you do one or two with them, you can kind of gauge an idea to what they are.
And then there\u2019s also websites like Policygenius. We\u2019ve had them as an ad sponsor before. We just go online and plug in the information and they give you a quote. And then the fixed expenses. Since this is a single family home, the tenant is going to pay for the electric, the gas, the water and sewer. There are no HOA fees and the garbage is looped in with the property taxes, and it\u2019s like a user fee with the water, which will be billed back to the tenant, the user fee.
And then lastly, the variable expenses. On this, I did 8% for vacancy, 8% for maintenance, 8% for CapEx. So I gauge my percentage on the condition of the property and also the age of the home. This being a single family property, for vacancy, I went with 8% where if maybe this was a three-unit, I maybe would\u2019ve cut that down to 6% just because if one tenant moves out in the single family, I have no rental income coming in. But in a three-unit, at least I still have two other rental units bringing rent income in.
Then for maintenance, because it is an older home, I did the 8% CapEx, same 8%. The management fees, 8%, that\u2019s kind of a going rate in this area. I think I was paying 6.5% before with a property management company, but that was because it was a bulk rate. But it\u2019s between 8% to 10%.
I have my own property manager in place, so it ends up being less than that because I\u2019m just paying kind of the cost of having a property manager in a team. And so that will most likely be a lot less. But I always like to factor in what the current property management fees are in the area because one day I decide again, I want to use a third-party property management company. I already have it baked into my numbers.
But for this property, it would be a -$45 per month in cash flow. We did look and we did see that it is projected to have a 6% increase every year in the home\u2019s value. Maybe if I\u2019m going for appreciation that you know what, I can lose $50 a month, it\u2019s fine, and I\u2019ll just wait for the property to appreciate and I\u2019ll go in refinance and I\u2019ll pull a bunch of equity out, and then I\u2019ll go buy another property, or maybe I\u2019ll sell it in five years when it\u2019s projected to be worth more.
Those are some of the different scenarios that are running through my head when I\u2019m thinking about this. I don\u2019t buy usually properties that are a negative cash flow. This would be a new thing for me if I decided to go with this property for this. And I should mention too, which I don\u2019t think I did, was the purchase price I set here was $150,000. And that\u2019s what the seller had said that they would think they were maybe going to list it for. They weren\u2019t sure yet. And I did 7% for my interest rate, amortized over 30 years, and the loan amount would actually be $120,000 after putting down that down payment of 20%.
Next, I\u2019m going to take you to a second analysis that I ran on the property. And the second analysis is if I were to convert this back into a duplex. It\u2019s important to note too, that if you\u2019re going to be doing any rehab and you want to refinance, if you do the rehab, BiggerPockets does have a separate calculator. They have their rental calculator, which you still can build or bake in rehab into that calculator too. But then there\u2019s also the BRRRR calculator, and this one will be if you are doing a rehab and you\u2019re going to refinance. This will actually calculate your holding cost during the rehab period until you\u2019ve gotten it rented, until you\u2019ve refinanced.
For this one, I did the purchase price of $140,000 because remember, just because somebody is asking a certain amount of money does not mean that\u2019s what you have to pay for that property. If I\u2019m analyzing a deal, and I may use their asking price as a starting point, but that doesn\u2019t mean that\u2019s what I have to pay and like, \u201cOh, the deal doesn\u2019t work,\u201d I don\u2019t give up. I go in and I manipulate my purchase price.
I don\u2019t go in and say, \u201cOh, well, you know what? Maybe I can bump the rent up a little bit more.\u201d No, I want to be super conservative on what my rent is and also what my expenses are. Inflating expenses, not too much so that they\u2019re not realistic, but also keeping my rental income low and not over inflating that. And then if I end up being able to list the rent for even more like, great, that\u2019s bonus money.
For this one, I ran it with $140,000 as a purchase price. And this one, I did that I would purchase it with my line of credit where I pay 9% with my line of credit. I\u2019d be paying that 9% interest only to my line of credit. I put that I could expect to refinance within four months. If I set aside a month to do the rehab, which would be blocking off the separate door by creating a wall in the stairs and then also adding that shower into the lower bathroom, realistically, that would take less than a month. But I\u2019m giving myself a month to actually take care of that.
And then by the time I close with the bank financing, I\u2019m giving myself plenty of time by saying four months. Differences with this, there\u2019s no down payment. I\u2019m just taking the full $140,000 off my line of credit, paying the 9% interest, and now I\u2019ll be paying $1,050 in interest a month until I\u2019m able to refinance on that property.
For the refinance, I would like to do a residential loan at 30 years. As of yesterday, when I talked to a lender at one of the banks I use, the approximate rate would be 7.5% for that. My loan fees I put at $4,000, which is they\u2019re usually around 3%, I would say, on the residential side, and then my monthly P&I would be $971 and 91 cents. And that\u2019s also with baking in those loan fees as adding that. But so this total loan amount, I did it at $135,000. So that\u2019s with me leaving $5,000 of the purchase price into the deal.
And then also the rehab, I estimated at $10,000. I really think the rehab is going to be less than that, but I need to clean up the yard and there\u2019s a couple other little updates that I want to do to the property. I\u2019m being conservative with that $10,000 by over-inflating it a little bit. But I\u2019m leaving money into the deal on this property. I\u2019m only pulling out $135,000, but I have 150 into the deal. This makes my cash-on-cash return 11.22%. I usually target more for 15% at minimum on cash-on-cash return. This would leave my monthly cash flow $116 and 93 cents.
And my monthly income, this is the part that I really like about turning this property into a duplex, is my monthly income would be $2,100 because now I have two units and I\u2019m able to get more for a three-bed, one bath, and a two-bed, one bath, than a five-bedroom, single family home with one and a half baths. So that was where I was kind of looking at the property and figuring out, okay, what can I do different to maximize the income, put a little rehab money into it.
And there\u2019s other examples of this. Maybe you have a property that has a large driveway, can you rent out parking spots to the neighbors, to someone to store an RV, a boat? Does it have a garage? Does it have a barn? We have one single family home that has this huge barn that we rent that out separately for somebody for storage.
I love looking at a property and thinking about, okay, what are the things that I can do different to make this a better deal instead of looking at it and how can I manipulate the numbers in a negative way that I end up just becoming underwater because I\u2019m not getting the rent I wanted? I cut out the lawn mowing expense thinking that I could find it a lot cheaper than what it actually costs to have the grass cut.
As you look at the expenses here, you\u2019ll see that there are different expenses now that I do have to pay though because it is now the duplex. Water and sewer, it is not separately metered. I will be paying the water and sewer. I could charge back a water fee if I wanted to, but most of the properties in that area do not. I want to stay competitive.
If I did charge it in, I would probably have to drop the rent anyways, bake in that water fee, and it would just end up being the same amount anyways. And then my insurance may be a little bit higher. I found compared to single family, that on duplexes, my insurance costs do become a little bit higher because of, I don\u2019t know if it\u2019s a liability portion of having two tenants or just the cost of the property to rebuild because now you have two kitchens to replace, two bathrooms to replace.
And then also the gas for the property, that is the heat source. And for the hot water tanks, that is not separately metered, only the electric is. The gas would be paid by me, the landlord, because there\u2019s no way to tell which tenant used which meter or used how much because there\u2019s not the separate meters to actually bill them back.
This puts it at the monthly cash flow $116, cash-on-cash return 11.22%. The purchase cap rate, which honestly I don\u2019t care that much about a purchase cap rate is 9.33%, and then the pro forma cap rate 6.53%. Your monthly income, $2,100 a month, your monthly expenses, $1,983 and 7 cents.
The last thing I factored into this is I put in the analysis over time, saying that I can expect a 3% increase in rental income, 3% increase in expense income, which probably could be a little bit more for each, and then the 5% per year property value increase. Remember that statistics showed us that it\u2019s projected to be 6%. I\u2019m being conservative, and I did 5%, and then I just kind of laid out how the property would appreciate.
But also on the calculator report, it\u2019s really nice because when you put in how you\u2019re financing the deal, if there\u2019s a mortgage, it also calculates with your loan balances based on if you made your payments to pay down principal and interest, paying down the principal balance and gaining equity by the 5% increase every year from appreciation, but also by that loan balance being paid down and what your value is going forward and how much equity you actually have in the house.
I hold the property for 30 years. It\u2019s projected to have $860,000 in equity. But yeah, so that\u2019s just kind of an insight as to how I would do an analysis on a single family or duplex property.<\/p>\n
And world-class breakdown, Ashley Kehr. Let me ask you, how much of what you did has changed between Ashley of, I don\u2019t know, 2019 versus Ashley of today? Because that was obviously a lot of information. I\u2019m just curious how much of this is just have you learned through repetition? Because I guess I don\u2019t want our listeners to hear this like, man, I\u2019m not well-equipped to do any of that. It\u2019s just like was there a starting point you kind of built on top of it or just, I don\u2019t know? Just give us some insights into how it\u2019s changed, I guess.<\/p>\n
Yeah. When I first started out, it was very much on a piece of paper. It\u2019s like here\u2019s what the expenses are. And then I actually got very diligent in verifying everything, and that\u2019s where I do the dollars down to the penny. And then that\u2019s where I kind of transitioned into, okay, I can ballpark the property taxes.
For the example I showed you, I don\u2019t really know a ton about that market. So that\u2019s where I was like, I need to know exactly what the property taxes are, in which I do do that but for rough analysis for a market I\u2019m already investing in, I\u2019ll ballpark the property taxes and the insurance, the water bill, things like that. And if it comes out looking kind of good, then that\u2019s when I go further in and I actually pull the exact number.
Right now, what has changed for me with the market is, what are my options for funding and also refinancing this deal, so really getting creative with that. Right now my line of credit is a lot cheaper than using hard money or a private moneylender. And I want to use that to my advantage so that I can be more competitive because I have that rate.
Also with my private moneylenders, what can I work out with them? Maybe if I\u2019m not even using them for all of the deal or part of the deal, definitely putting in offers for seller financing. I\u2019m getting more flexible on how I\u2019m actually going to fund the deal and how I\u2019m going to get creative with the financing going forward.
The next thing I\u2019m looking at is to what are the income streams on the property? Right now in Seattle, Washington, you can put an ADU, an additional dwelling unit on a single family home. You can put the ADU in your backyard and that can increase the value of your property and also bring in rental income. If you\u2019re going to sell this house as a flip, now it makes it more affordable to someone because they have that rental income of the ADU in the back. They can now pay more for the property, and that\u2019s more in your pocket.
And a lot of times, the cost of building that ADU is less than what you could actually sell that property for. For me, it\u2019s looking at all the different revenue streams that can come out of that property. With this one, it was changing that single family back into a duplex to really maximize that revenue.
Oh, one thing, yes. There\u2019s one last thing I would add is that in my market at least, there\u2019s been huge rent growth over the last couple of years, but it has become very stagnant. Be careful that you are not riding those high projections again of what you can get for rental income. Look at the rental growth trends for your area too. I just got a six-unit emailed to me in this morning from my broker, and I\u2019m looking at what the seller had projected the rental incomes that you could get because they said it\u2019s way below market rent. You should be able to get this.
And when I pulled comps, you could not get that comps from last year. You could get that but it had decreased by like a hundred dollars of what they were renting for last year. And that hundred dollars makes a big difference across the bottom line when it\u2019s a six-unit. So that\u2019s $600 a month that you\u2019re not getting any more as to what they\u2019re projecting. And if you go off of old numbers that aren\u2019t accurate, then that\u2019s where you can get into trouble. To even be more conservative, I always go a little bit under as to what the market rent is.<\/p>\n
Yeah, that\u2019s a really good point, and I\u2019ll talk a little bit about that same concept as well, Ash, about making sure that your data reflects recent changes in the market that you\u2019re looking into. But, cool. Let\u2019s talk analyzing short-term rentals. There\u2019s some overlap obviously between what Ashley just explained when she\u2019s looking at long-term rentals and what we\u2019ll be doing with short-term rentals.
Specifically on the expense side, when you\u2019re analyzing the expenses for a property as a long-term and as a short-term, you have mortgage expenses, principal and taxes and insurance. You have utilities, just that on a short-term rental, you are typically paying the utilities versus with a long-term rental, so you can pass that along to your guest. The expense side is pretty similar. A lot of those inputs are the same.
Where long-term and short-terms really differ is on the income projection side. Ashley talked about how. She just mentioned it, right? She looked at comparable properties to see what they were renting for today, and usually it\u2019s one fixed number that you can assume you\u2019re going to make over the life of that lease.
If I say this property\u2019s going to rent for $1,300 and then I sign a lease with a tenant for $1,300, then I know for the life of that lease that I\u2019m going to make $1,300. With short-term rentals, you have variable income on a monthly, weekly, daily basis that you need to account for. I\u2019m going to talk about what that exact process looks like for analyzing or estimating the income on a short-term rental.
When you are analyzing a property as a short-term rental, specifically when it comes to the income, there are three kind of key pieces of information that you need to understand. You need to understand your average daily rate, which is also called your ADR. You need to understand your occupancy and you need to understand your cleaning fees. And I\u2019ll break down each one of those three pieces. Again, your average daily rates, your occupancy, and your cleaning fees combine to make up your income for a property. Let\u2019s go over ADR first.
ADR again stands for average daily rate. And basically what this number is, is that it\u2019s the number that guests are willing to pay to stay at your property for a single night. And usually when you\u2019re analyzing a property, you want your ADR to be an average across the entire year. You say on average across an entire 12-month period, 365 days, what are guests willing to pay for one night at my property?
And the reason we want to make sure that we\u2019re looking at an entire year is because in the short-term rental industry, what people are willing to pay for a single night varies pretty dramatically depending on the night of the week that they\u2019re booking, right? People are typically willing to pay more for a Friday or a Saturday night booking than they are for a Tuesday night booking, because there\u2019s more people traveling on the weekends. The night of the week makes a difference. The week of the month makes a difference, and the month of the year makes a big difference as well.
Most seasons kind of have their peak time, and most seasons kind of have their slow time. For me in some of my markets, summer is the busiest time in some of my markets, whereas in other markets, summer is the slowest time. You want to understand what those nuances are in your market to make sure that you\u2019re accounting for that in your average daily rate projection.
Again, your ADR is pretty heavily impacted by seasonality, so you want to make sure that you\u2019re looking at that number across an entire year. Now, I\u2019ll give you guys a breakdown on how to actually identify what that ADR is. But for now, I just want you to understand ADR stands for average daily rates, and it\u2019s the number that shows you what your guests are willing to pay on average across an entire year for one night at your property.
Next is your occupancy. Occupancy tells you how many days out of the year you can expect to be booked. Now again, if I\u2019m comparing short-term rentals to long-term rentals, once you sign a lease with a tenant, you can expect your property to be fully booked, or at least that unit to be fully booked for the entire duration of that lease. If you sign a 12-month lease with someone, then you know for the next 12 months, you are going to be fully occupied.
Whereas with short-term rentals, we don\u2019t have leases that we sign with tenants, we have guests who come in and stay for a couple of nights and then they go home. There\u2019s always some percentage of nights that go unbooked, and that\u2019s what you want to try and identify for your occupancy is, okay, out of 365 days, how many days can I expect to be booked?
And again, you want to look at this number as an average across a year for the same reasons that we want to look at your ADR on average across an entire year because your occupancy changes or goes up and down depending on the month of the year. And again, I\u2019ll show you how to pull these numbers here in a sec.
And then the last thing that you want to look at that gets included in your income is your cleaning fee income. Now, this is something that\u2019s unique to short-term rentals, but when you book a property on Airbnb or Vrbo, as a guest when you book a property, not only are you paying for the stay, for your nightly rate, but you\u2019re also paying for additional fees. Airbnb charges fees, Vrbo charges fees, but then the host also charge what are called cleaning fees. And this cost usually gets passed on to your cleaning staff.
However, you should recognize it as income for two reasons. First, because it\u2019s included in your deposit from Airbnb and Vrbo when they pay you out, and then second, you also have the opportunity to turn your cleaning fee income into a slight profit center. As an example, on some of our properties, we might pay our cleaners, I don\u2019t know, $115 per clean, but we can charge our guest $125 per clean.
So that means if I\u2019m only paying out $115, but I\u2019m collecting $125, every time that property gets clean, I\u2019m making a profit of \u201c$10\u201d. And say that my property, I don\u2019t know, maybe I get booked 10 to 15 times per month, that\u2019s an additional $100 to $150 in profit that I\u2019m generating from my cleaning fee. I usually like to include my cleaning fee as part of my income for a property as well, for those two reasons.
Again, to recap, your three pieces are your average daily rates, your occupancy, and then your cleaning fees. Once you have all three of these, you want to put them into a formula. And again, I\u2019ve got a free calculator that you guys can all download if you had to, therealestaterobinsons.com\/calculator. Again, that\u2019s therealestaterobinsons.com\/calculator. It\u2019s a free download. It\u2019s an Excel file that I\u2019ve used. Tens of thousands of people have downloaded this calculator to help them analyze deals. But if you want to kind of follow along on that calculator, you\u2019ll be able to do that there.
But once you get all of that data, you want to plug into a formula to understand what your projected income is. Basically, you take whatever your occupancy percentage is and you multiply that to 365 days, and that will tell you how many days out of the year you can expect your property to be booked.
Say from your analysis, you say, \u201cHey, 75% is a good occupancy number for this property in this market.\u201d You would take 75%, multiply that to 365, that gives you 274. Now you know, okay, I\u2019m going to be booked roughly 274 days out of the year. So that\u2019s the first step. The second step is to take that 274 or whatever number you land on and multiply that to your projected average daily rate, to your projected ADR.
Let\u2019s say that you have 274 days you project to be booked, and say, through your analysis, you say $250 is a good projection for my ADR. You take 274, multiply that to 250, and you get $68,500 in baseline revenue. Let me repeat that one more time. 274 days is what you project to be booked. You multiply that 274 times your projected ADR. Again, in this example, let\u2019s say it\u2019s 250. 274 times 250 equals $68,500. That\u2019s your baseline revenue for your property.
The last step then is to add in your projected cleaning fee income. Again, there are steps you can take to understand, \u201cHey, what\u2019s the average cleaning fee that properties are charging in my market?\u201d You use that data to assume what your cleaning fee is for the year, and then you add that to your baseline income. Again, say we have a baseline of 68,500, and through our analysis, we identify we can collect another $18,000 a year in cleaning fees, which is not unreasonable at all. $68,500 plus the $18,000 in cleaning fees gives you a total income of $86,500.
Those are the inputs that you need to project your income. You need your occupancy percentage, which gives you how many days you\u2019ll be booked out of the year. Multiply that to your projected average daily rates, which gives you a baseline income, and then you add to your baseline income what you project your property will collect in cleaning fees to get your total income on that property. So that\u2019s the kind of overview of how you project your income.
Now, I want to break down just a little bit more detail how to project your average daily rates and your occupancy, because those two things are super critical to get right. Now, there are two kind of different ways to project your ADR and your occupancy levels for a property. The first approach is your comp based approach, so your comparison based approach. The second approach is what I call your percentile based approach. So your first approach, approach number one, is your comparison based or your comp based approach. The second approach is what I call your percentile based approach.
Now, let me break down what each of these means. In the comparison based approach or the comp based approach, what you\u2019re doing is you\u2019re looking for properties that are similar in size, design and amenities, functionality, location to your property. You have your subject property that you\u2019re analyzing, and you want to find other active listings on Airbnb or Vrbo that are similar in size, design, functionality, amenities, location, et cetera.
If yours is a brand new construction built in 2023, then you want to find other properties ideally that are brand new construction built in 2023. If yours is a farm-style rehab that was built in the fifties, you want to try and find other farm-style rehabs that are built in the fifties and recently rehabbed. If you have a lofts in downtown, you want to try and find other lofts in downtown. You kind of get the idea here, but the goal is to use Airbnb and identify properties that are similar to yours.
Once you have those properties identified, you want to understand what are those properties charging on a nightly basis across a 30, 60, 90-day window. And you want to go 30, 60, 90 again to account for the fact that prices are seasonal, that ADRs are seasonal. Because if you just look at a, say, seven-day window, you might be getting the best week of the year, or you might be getting the worst week of the year. Either way, your numbers are going to be off. But when you go out over a 7, 30, 60, 90-day window, you start to get a mix of what the different seasons and months can produce in terms of ADR.
You create your list of comparable properties right after you go through Airbnb. You can literally just open up Airbnb, look at your chosen market, click through, find listings that are similar, and open up their calendars to see what they\u2019re charging. It\u2019s a completely free way to do this, and you want to try and build out as many comparable properties as you can. The more, the merrier. I\u2019d say at minimum, you want to get somewhere between 10 to 15. Ideally, you want to get as many as you can. Don\u2019t put an upper limit. As long as it\u2019s a good comp, you should include it inside of your approach there.
Once you have your comp based, again, you want to go through those listings and understand how booked are they over a seven-day window, how booked are they over a 30-day window? What are they charging over a seven-day window? What is their average price over a 30, over a 60, over a 90-day window? Then you use those numbers, you get the averages of those, and you plug it into the formula that we talked about earlier. That\u2019s the first is the comp based approach.
The second approach is the percentile based approach. And I like doing both because the comp approach, it\u2019s kind of like your sniper rifle approach where you\u2019re picking out specific properties that you feel are exceptionally similar to yours, whereas the percentile based approach is kind of an aggregated approach that pulls in a little bit more data, but kind of gives you a better overview of the market.
Now, unfortunately, or not unfortunately, I guess fortunately, there\u2019s paid software out there to help you do this. I don\u2019t know of a way to do this for free outside of you trying to build your own scraping tool to pull all of this data, but there are websites out there like AirDNA and PriceLabs that are data providers for the short-term rental space.
We use PriceLabs for a lot of our data analysis, and I think, gosh, if you guys go to hello.pricelabs.co\/therealestaterobinsons, you get I think a 30-day free trial and then like 10% off of your first bill. Again, that\u2019s hello.pricelabs.co\/therealestaterobinsons. And what you want is their market dashboards tool. And with the market dashboards tool, you\u2019re able to collect an insane amount of data on the properties that reside within inside of your chosen market. If you\u2019re following along on YouTube, you can see this future prices table here that I\u2019m referring to.
And basically, what PriceLabs does is that for whatever dataset you choose, so say I want to look at a specific market and I want to look specifically at three bedrooms within that market, PriceLabs gives me both historical and future data on what prices, what ADRs are being charged at different levels. It breaks it down by, hey, at the 25th percentile, here\u2019s the average price that listings are charging. At the 50th percentile, here\u2019s the average price that listings are charging. At the 75th, here\u2019s the average. At the 90th, here\u2019s the average.
I can see across my market at different, I guess, levels of, not luxury but different levels of property quality where 90th would be top of the market, 25th would be the bottom of the market. I can see on average what are these different properties charging. And I love looking at this data because you can get super granular both looking at historical data and forward-looking data.
Now I\u2019ll try not to get too much into the weeds here, but basically you want to be able to pull this data and identify on a month-over-month basis, going back as far as you can. I think right now you\u2019re able to go back to like 2020 or maybe even 2021 in PriceLabs data.
And you want to go as far back as you can and just start looking at the trends. What is the average price for the month of July in 2021? What is the average price for the month of July in 2022, month of July in 2023? And start comparing those. And what you\u2019ll be able to see as you do that analysis is, what are the different price points I can expect to charge based on how nice my property is?
If I think my property will operate in the top 10% or that 90th percentile, then I can kind of look at that data set to help me gauge what my average daily price and my occupancy will be. If I think that I\u2019m going to be more kind of middle of the road budget listing, then maybe I\u2019m going to be looking at that 50th percentile to gauge that. But once you have those different percentiles mapped out and you\u2019ve looked at it month over month, year over year, you then have a really good handle on what do I think I can achieve with the listing that I have.
Now, one important thing to call out, and this is one of the changes that you really have to be aware of, and Ashley kind of mentioned this as she was talking about at the end there about her long-term rental piece. You want to understand if your market is up or down year over year. Now, we\u2019re recording this in the summer of 2023, and if you\u2019ve been following the short-term rental industry, 2021 was a crazy year for short-term rentals. It was immediately post-COVID. There was a tremendous amount of pent-up demand for short-term rentals and not nearly as much supply as there is today.
You saw this extreme amount of demand with this kind of lagging to keep up supply. You really saw a lot of listings do exceptionally well in 2021. 2022, you saw more supply come on board where you saw kind of demand come back down to somewhat normal levels. And I think 2023 will be the first year where we see maybe a more so normalized travel cadence, at least across the United States.
What you\u2019re seeing in many markets, and this isn\u2019t true for all markets, but in a lot of markets where 2021 has a higher revenue projection than 2022, and even where 2022 has a higher revenue projection than 2023. In the example that I\u2019m showing here, if you\u2019re following along on YouTube, we can see that the average price in this market for 2021 was $138. In 2022, that same data set had an average price of $135. Our ADR dropped by $3 in that same market year over year.
Now obviously, $3 isn\u2019t a huge swing, but you just want to make sure that you\u2019re accounting for that because maybe in this market, it\u2019s only a $3 drop, but maybe in a different market it\u2019s a $15 or $25 or a hundred dollars drop, which makes a big difference in ADRs over an entire year. You want to make sure that not only are you looking at what am I projecting this property to do, but what is the difference year over year, and am I accounting for that on my projections of this property?
And the approach that I\u2019ve just laid out, even though I\u2019m talking ADRs, you can pull that exact same information for your occupancy rates as well. And that\u2019ll allow you to see, hey, at the 25th, the 50th, the 75th and 90th percentile, what kind of occupancy numbers am I seeing? Once you have all that data, then you\u2019re able to drop it into a calculator and the data that you pulled, it drops right into the calculator that I share with you guys. Again, if you go to therealestaterobinsons.com\/calculator, you can get a free copy of this.
But here\u2019s just an example of a sample deal that we\u2019ve looked at. The property that we were looking at had a purchase price of $665,000. It was a 15% down payments. We were estimating about 3% for closing costs. That would bring our total cash investment to just under $120,000. Based on our research, we saw an average daily rates or an ADR of 385 for this property. We projected our occupancy to be 77%, and then we saw another $2,200 give or take in cleaning fee income, bringing the total income of that property to $134,000.
Now, again, don\u2019t worry about the specifics here, but just know we took our ADR, our occupancy, and our cleaning fee income, and we came to a total gross income of $134,000, almost $135,000. We then plugged in all of our expenses, so again the basic stuff, your mortgage rates, your mortgage amount, your insurance, your taxes.
The one thing that again is kind of unique to short-term rentals is Airbnb also charges a fee for you to be on their platform. That\u2019s how they keep the lights on. And as of this recording, Airbnb charges a 3% fee to host on every single booking. You\u2019ll want to make sure that you\u2019re accounting for that 3% in your analysis as well. On $134,000 in revenue, a 3% fee is about $4,000 annually that you\u2019re paying to Airbnb. You want to make sure you\u2019re accounting for that as well.
But anyway, once we do all that, we\u2019re able to see what our total cash-on-cash return is for this property and allow us to make a decision on if it\u2019s a good deal or not. I know that was a lot of information. If you guys want to go back and watch us on YouTube, I encourage you to do so.
But just at a high level, to recap what I\u2019m talking about here, the steps you need to take, the data that you need, you want your average daily rate, you want your occupancy, you want your cleaning fees, you want to find comparable properties either through the comp approach or using the kind of aggregate data from something like PriceLabs. Take that information, plug it into that free calculator, and then you kind of spit out a cash-on-cash return. And you\u2019ve got to decide whether or not that cash-on-cash return is good for you.
I hope that was helpful, guys. Again, if you\u2019re watching on YouTube, you can scan this QR code to download that free calculator. If you\u2019re listening to the podcast, just hit over therealestaterobinsons.com\/calculator, and you can get yourself a free copy of that as well. But that was a mouthful. I\u2019m going to shut up now because that was a lot of information. I don\u2019t know, Ash, I guess any thoughts from you?<\/p>\n
I think David and Rob might not have us back because we went way over the time that they allotted us. But thank you guys so much for joining us. We hope that you took some value away. And so our little intro there about just deal analysis in general and then the deep dives into real life deals that Tony and I are looking at.
Thank you guys for listening whether you\u2019re on The Real Estate Podcast or you\u2019re listening on The Rookie Podcast. I\u2019m Ashley, @wealthfromrentals, and he\u2019s Tony, @tonyjrobinsons, on Instagram and you can hear from us again on the Real Estate Rookie Podcast or on YouTube searching Real Estate Rookie. We also have a huge community page on Facebook, Real Estate Rookie. Thank you guys and we\u2019ll see you next time.<\/p>\n