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Real Estate by the Numbers: A Complete Reference Guide to Deal Analysis
Master the simple formulas behind every great real estate deal for a foolproof investing strategy. Whether you’re looking to purchase your first rental property, scale a portfolio, or evaluate massive syndication deals, every great real estate deal comes down to a few key metrics. From cash flow to compound interest, Real Estate by the Numbers makes it easy for anyone to master the concepts that form the foundation of real estate investing. J Scott—best-selling author of four business books—and Dave Meyer—VP of Analytics at BiggerPockets—combine their data-driven investing experience to teach you everything you need to analyze deals, track your progress, and think like a professional investor. This book makes real estate math easy, and real-world examples from the authors’ own portfolios will help you put these equations into practice. Not only will you maximize your returns, but you can build a personalized strategy and adapt it to changing market conditions. Real Estate by the Numbers is the real estate reference guide that you’ll come back to time and time again! Inside, you’ll
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Published November 15, 2022
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April 27, 2024Knowing the answers might make you smart, but knowing the questions to ask makes you wise.
the time value of money
“encumbered” simply means that an asset has a loan against it.
A Personal Financial Statement is a snapshot of a single point in time, and as such, it will always contain a date
We believe that anything that can be converted to cash in less than a week should be considered a liquid asset
If your income is variable (i.e., it changes each month), you can use what is known as a “trailing average.” Basically, you want to figure out your average monthly income. A good way to do this is to add up everything you’ve made over the last three months, and then divide the total by three. This will give you your average monthly income.
Set for Life, a great book by Scott Trench
We’ve separated the land value from the building value (also known as the “improvements”) because the building value provides some specific tax benefits
Gross profit margin. This ratio indicates how efficiently the company is producing their products compared to their competitors.
Operating profit margin. If the business is splurging on expensive offices and unnecessary employees, this number will be lower than if the business is careful with its expenses and not overspending on things that don’t drive the profitability of the company.
net profit margin indicates how efficiently you are converting revenue into owner value and profit.
When that tenant moves out, you will spend time “turning over” the unit—performing routine maintenance, finding a new tenant
Other Income. late fees due to late rent payments can contribute to other income, as can application fees paid by prospective tenants and pet fees charged to tenants with pets.
When you take a loan against a piece of real estate, you will most likely be paying the lender back some combination of principal and interest (P&I) monthly. This regular P&I payment to the lender is referred to as your debt service.
Some examples of CapEx items include replacing the roof, replacing an HVAC system, and upgrading the electrical or plumbing systems.
We account for CapEx items differently than regular maintenance items because they are treated differently by the IRS when it comes time to do our taxes.
Capital expenses are the big-ticket items that pop up after five, ten, twenty, or more years. While we don’t often think about these costs before they become necessary, we should. if the cost isn’t planned for, it can put you in a bad financial situation.
if you have a $12,000 roof expense every twenty years that you haven’t factored into your analysis, that means that your $40,000 assumed profit is just $28,000. And your average annual profit is really $1,400, not $2,000. If you’re relying on your properties to support you with their profits long term, it’s important that you have accurate profit numbers!
“What is my net worth?” and “What is my business worth?”
Opportunity cost is the risk of making a specific decision. Every time you make a decision, you risk the potential loss of a better outcome had you made a different decision.
When applying interest concepts to situations outside of lending/borrowing, we often change the terminology from “interest rate” to “rate of return” (ROR). That allows us to differentiate between investments that are loans versus other types of investments.
interest payments on loans are generally fixed and defined by a contract (often called a “promissory note”).
It’s not about timing the market; it’s about time in the market.
Instead of taking the monthly rent your properties are generating and sticking it under the mattress until you have enough to buy another property, try to figure out how to invest the smaller sums more quickly to increase the compounding effects.
PEMDAS “Please Excuse My Dear Aunt Sally”
there is a great decision-making tool called expected value (EV). Expected value is simply the long-term average result you should expect when you make the same financial decision over and over.
It made me wonder whether I was throwing money away by purchasing insurance policies for my flips, and whether it would be more cost-effective to “self-insure” my properties. Here were the assumptions I used:
A typical insurance policy for a flip will cost about $1,000.
On about 1 out of 50 flips (2 percent), I’d have a small ($10,000) claim.
On about 1 out of 200 flips (0.5 percent), I’d have a big ($100,000) claim.
On the rest of the flips (97.5 percent), I’d have no insurance claim.
What should I be willing to pay today for some amount of money in the future? (Present value)
Time value of money (TVM) is the concept that money in hand today is worth more than money in hand at some future time.
the best investors don’t just think about making more money; they also think about making money sooner.
I also received an inquiry from an investor. He told me that he really wanted to buy the house, but that he wasn’t going to have the money for about seven more months, as he was waiting for a seasoning period to end on another property he owned that he was planning to refinance.
Luckily, I was familiar with TVM, and I knew that getting the $120,000 now would be more valuable than getting it in seven months. I also knew that I could use the FV formula to determine how much that $120,000 would be worth to me seven months from now.
discount rate is often referred to as the “hurdle” or “hurdle rate.” It’s the hurdle we have to surpass to achieve our required or desired rate of return.
A good rule of thumb is that if NPV is positive, it’s an opportunity you should consider pursuing. If the NPV is negative, it’s an opportunity that should be ruled out (or renegotiated). This type of computation is not just useful for calculating the viability of owner-financed deals—it should also be used for BRRRR
let’s say that we didn’t currently have the cash to make this investment, but we knew that we could take out a home equity line of credit (HELOC) on our personal residence to acquire the $100,000 to invest.
When I (J) worked at eBay several years ago, everything would go through an NPV analysis.
Luckily, you don’t have to figure out the allocation of principal and interest yourself. Your lender(s) should send you an IRS Form 1098 at the end of each year indicating the amount of interest paid for the year, and this number will be used for your mortgage interest deduction. If you have multiple loans against a property, you will receive multiple Form 1098s, and each interest amount will be deductible in that year.
Depreciation is divided equally over a set period (the physical structure(s)) —27.5 years for residential property and 39 years for commercial property.
Examining the county tax assessment, you estimate the structure value is about 73 percent of the total property value. You purchased the property for $1 million, so you assume that the cost of the structure is $1,000,000 × 73% = $730,000.
Finally, you paid $13,000 in points on your twenty-five-year loan. Your accountant says that you can amortize those points at $13,000 ÷ 25 = $520 per year.
thanks to inflation, a dollar tomorrow is worth less than a dollar today.
Deferring your taxes for thirty years can cut the total hit to your net worth in half!
One of the simplest ways to benefit from real estate tax advantages is by using your personal residence exemption, also known as the Section 121 exclusion.
The personal residence exemption allows you to sell your personal residence and avoid having to pay taxes on the first $250,000 in gain ($500,000 if you’re married), so long as you have owned and lived in the property for at least two of the previous five years. There are many investors who take advantage of this exemption by selling their personal residence every two years.
If you have held the property for less than a year and a day, you will pay taxes at the short-term capital gains rate, which is substantially higher than if you have held for at least a year and a day, where long-term capital gains kicks in.
(CapEx) are technically not included as part of the NOI. From an accounting perspective. you would almost certainly find CapEx listed below the NOI line.
“Capital Reserves” or “Replacement Reserves.” This is just a fancy name for expected capital expenses and is a placeholder for the amount of CapEx expected to be spent in a given year on the property.
we’ll often find that buyers will include CapEx above the NOI line (to reduce NOI and the perceived value), while sellers will include CapEx below the NOI line (to increase NOI and the perceived value).
operators who raise outside capital from other investors, like in a syndication, will need to define the hold period up front to give investors an idea of when they can expect their money back.
More likely, the one with a higher cap rate has additional risk associated with it. Perhaps the property has a lot of deferred maintenance (needed repairs), which poses a risk to a new owner. Perhaps it’s in a pocket of town where there tends to be more crime. Perhaps it’s just a little farther from public transportation, making it less desirable for tenants.
instead of assuming it’s a great deal, you should instead be asking yourself what is wrong with the property.
At the time of this writing, I (J) am buying large multifamily properties in the Houston, Texas, metro area. I’m looking for properties that are at least 150 units, built after 1980, class B properties, and close to downtown Houston.
Want a Tesla that’s going to cost you $800 per month in a car loan? Buy a rental property (or several rental properties) that will generate $800 per month in income.
a percentage gain followed by an equally sized percentage loss results in less money than the original sum.
AAR simply averages the positive and negative returns, it counts both of them equally. It treats negative returns as no worse than positive returns—but as you now know, they are! For this reason, any AAR calculation that has a negative return for at least one period will overestimate the growth rate.
CAGR is well suited to measure the long-term gains from any type of real investment where profits can be reinvested, such as traditional rentals, BRRRRs, short-term rentals
CAGR is not meant to calculate returns on investments with multiple inflows and outflows. For that, we’re going to need to use another metric, IRR, which can consider the TVM of many inflows and outflows over the hold period of the investment. apply the XIRR( ) formula to the columns
you may hear IRR referred to by different names—on your mortgage truth-in-lending statements as “annual percentage yield” (APY) or as the “effective interest rate” of a loan.
those who invest in development projects or rehab properties, IRR is the preferred metric.
rely on CAGR over ROI or AAR in any investment where profits can and are reinvested.
We don’t paint a bathroom a specific color because we like that color—we paint it the color that will generate the most income.
Page 270 excel
learn about “capital stacks,” a helpful framework to visualize how real estate deals are financed
Payment is always made starting from the bottom of the stack and finishing at the top. Those lower in the stack get paid first and therefore have less risk. Page 285 excel.
We sometimes refer to equity that is lower in the capital stack—and that has a higher priority for payment—as “preferred equity.” When profits are paid out, preferred equity gets paid first. Melissa holds preferred equity over Brian’s common equity.
A credit partner brings their credit to a partnership, enabling the partnership to take on more debt than an investor could qualify for on their own. For example, if Sarah has several mortgages in her name and banks are now hesitant to grant her another loan, she could partner with someone who has good credit and less debt in their name. That way Sarah gains access to debt financing she couldn’t get on her own, and her partner gains access to Sarah’s experience owning several properties already.
Page 304, 305 excel.
three primary types of debt financing used: term loans, lines of credit, and revolving debt.
If you’ve ever heard of a 7/1 ARM, for example, that means that the initial interest rate is locked in for seven years, and then the rate is adjusted every year after that for the duration of the loan.
If you’re buying a rental you intend to hold on to for a long time, and if you can lock in a relatively low interest rate, it likely makes sense to get a fixed-rate mortgage. If you’re using a BRRRR strategy and intend to refinance in a year or two, you could get an adjustable-rate mortgage to take advantage of the lower initial interest rate and refinance well before you take on the risk of having your interest rate adjusted.
the term “hard” in hard-money lending refers to the fact that the loan is secured by a hard asset, like a piece of real estate.
If you have poor credit, are self-employed, or have too many personal mortgages already, seller financing could be a great opportunity.
If you want to fund a rehab, purchase a new property, or anything else, a line of credit is a low-cost form of debt financing you should consider. But not everyone is eligible for lines of credit. In exchange for the flexibility the bank provides with a LOC, they often look for very creditworthy businesses and individuals, or ask for collateral, like with a home equity line of credit (HELOC).
Principal is the amount of money borrowed from the lender. Interest is the lender’s profit.
you may have a credit card that charges an interest rate of 20 percent on any unpaid balance. However, when all the fees are factored in, the amount you wind up paying (your APR) is closer to 23 percent.
the result of which is called an amortization schedule.
many investors will look for loans with the longest amortization period, even if there is a balloon payment associated with it.
Page 335 chart.
strength of the borrower (e.g., credit score, investing experience, total assets)
Most commercial lenders will look for a DSCR of at least 1.2 to 1.3.
Generally speaking, the higher the loan constant, the more the loan costs you, regardless of the interest rate. When you have multiple debts—whether it be mortgages, car loans, or student debt—and you are deciding in what order to pay them off, you should focus on those with the higher loan constants first.
If you’re doing a good job of maintaining your properties and consistently improving management efficiency, hopefully your rents are increasing faster than your expenses.
return on equity and cash-on-cash return measure how much cash flow is produced for each dollar invested into a deal. But which one should you use, and when? As we said in Part 3 of this book, COC is a great metric to evaluate cash flow at the time of purchase. As a quick refresher, COC = annual cash flow ÷ cash invested. It’s best used at the time of purchase because it factors in up-front costs like your down payment and any initial out-of-pocket expenses you incur to improve the property.
if you want to build wealth as quickly as possible, you need to reinvest your profits.
Selling isn’t always the best way to boost ROE. In these cases, an alternative is through a refinance.
Refinancing a property allows the owner to essentially “reset” their mortgage. There are two ways to do it: traditional refinance or cash-out refinance.
We recommend that each year, you sit down and calculate ROE for every property in your portfolio. Then, compare those ROE rates to what you could get from refinancing or selling your properties, and determine whether you could deploy your equity more efficiently.
1. What type of deals are right for me to achieve my goals?
2. What returns do these deals need to offer for me to achieve my goals?
Most of us aren’t born wealthy. At some point, we need to start earning money to survive. And the most common way of doing that is to trade our time and effort to get it. In other words, we get jobs.
Jobs are—for the most part—transactional. We agree to provide our work in exchange for a lump sum of money. That lump sum may be in the form of hourly compensation, a salary, a fixed fee (like consulting), or a commission (getting paid based on performance and results).
With real estate, nobody is fixing the return on your investment. If you are good at finding undervalued properties, you can generate higher returns. If you’re a good negotiator, you can generate higher returns. If you’re good at managing your properties efficiently, you can generate higher returns. If you do your research and buy in the right place at the right time, you can position yourself for higher future returns. If you renovate your properties correctly and attract great tenants, you can create higher returns.
a promissory note (it’s a promise to repay the loan)
non-performing notes as those where the borrower has stopped paying, or is behind on payments.
depreciation means a reduction in the value of an asset over time. The physical structure in a real estate investment (as opposed to the land it sits on) will deteriorate over time. The IRS recognizes that there is a cost associated with maintaining the physical asset, and they compensate investors in the form of a tax deduction known as depreciation.
The interest you pay on your mortgage on investment properties is fully deductible against income.
Capital gains exclusion on the sale of a primary residence. If you live in the property for at least two years, and if the amount of the gain is below certain thresholds, you can literally earn up to hundreds of thousands of dollars on a sale without owing anything in taxes.
if we know that a new roof will cost $10,000 and will need to be replaced every twenty-five years, we can estimate the annual average cost for that roof to be $10,000 ÷ 25 = $400.
Page 459 excel.
The rule states that—on average—the NOI for a single-family investment will be about 50 percent of the gross rents.
when evaluating a cash-flowing rental property, we’re always looking at all four of the returns we might receive from the investment: 1. Cash flow 2. Appreciation 3. Amortization 4. Tax benefits
we can look at the cash-on-cash return (COC) metric.
Dig Deep
Keep in mind that COC is a good indicator of our annual return early in the project.
Excel provides a function (CUMPRINC) that will allow you to calculate the amount of equity— through principal paydown—being accrued over time.
Because we will likely pay the depreciation savings at some point in the future—when we sell—we prefer to think about these savings as an interest-free loan from the government between the time we save the taxes and the time we eventually have to repay them.
The second reason is that while prices do tend to increase over time, so do expenses. In many parts of the country, we’ve seen 2 percent to 4 percent average annual price increases in real estate over the past century.
To assume rents or values will outpace inflation in the long term is risky and uncertain
using a loan (conventional, portfolio, hard money, or private loans can all be used), purchasing with your own cash (or that of your friends and family), or bringing in a partner to provide the cash.
One of the big benefits of being able to increase value through renovation is not just that we can get more equity out of the property, but that we can do so without increasing LTV (which would increase risk). Some investors will refinance after renovation, using loans that provide significantly higher LTVs; we would caution that the BRRRR method shouldn’t be used to overleverage a property or a portfolio.
keeping our loan-to-value ratio (LTV) at 75 percent—a relatively safe percentage, in our opinion.
the time value of money
“encumbered” simply means that an asset has a loan against it.
A Personal Financial Statement is a snapshot of a single point in time, and as such, it will always contain a date
We believe that anything that can be converted to cash in less than a week should be considered a liquid asset
If your income is variable (i.e., it changes each month), you can use what is known as a “trailing average.” Basically, you want to figure out your average monthly income. A good way to do this is to add up everything you’ve made over the last three months, and then divide the total by three. This will give you your average monthly income.
Set for Life, a great book by Scott Trench
We’ve separated the land value from the building value (also known as the “improvements”) because the building value provides some specific tax benefits
Gross profit margin. This ratio indicates how efficiently the company is producing their products compared to their competitors.
Operating profit margin. If the business is splurging on expensive offices and unnecessary employees, this number will be lower than if the business is careful with its expenses and not overspending on things that don’t drive the profitability of the company.
net profit margin indicates how efficiently you are converting revenue into owner value and profit.
When that tenant moves out, you will spend time “turning over” the unit—performing routine maintenance, finding a new tenant
Other Income. late fees due to late rent payments can contribute to other income, as can application fees paid by prospective tenants and pet fees charged to tenants with pets.
When you take a loan against a piece of real estate, you will most likely be paying the lender back some combination of principal and interest (P&I) monthly. This regular P&I payment to the lender is referred to as your debt service.
Some examples of CapEx items include replacing the roof, replacing an HVAC system, and upgrading the electrical or plumbing systems.
We account for CapEx items differently than regular maintenance items because they are treated differently by the IRS when it comes time to do our taxes.
Capital expenses are the big-ticket items that pop up after five, ten, twenty, or more years. While we don’t often think about these costs before they become necessary, we should. if the cost isn’t planned for, it can put you in a bad financial situation.
if you have a $12,000 roof expense every twenty years that you haven’t factored into your analysis, that means that your $40,000 assumed profit is just $28,000. And your average annual profit is really $1,400, not $2,000. If you’re relying on your properties to support you with their profits long term, it’s important that you have accurate profit numbers!
“What is my net worth?” and “What is my business worth?”
Opportunity cost is the risk of making a specific decision. Every time you make a decision, you risk the potential loss of a better outcome had you made a different decision.
When applying interest concepts to situations outside of lending/borrowing, we often change the terminology from “interest rate” to “rate of return” (ROR). That allows us to differentiate between investments that are loans versus other types of investments.
interest payments on loans are generally fixed and defined by a contract (often called a “promissory note”).
It’s not about timing the market; it’s about time in the market.
Instead of taking the monthly rent your properties are generating and sticking it under the mattress until you have enough to buy another property, try to figure out how to invest the smaller sums more quickly to increase the compounding effects.
PEMDAS “Please Excuse My Dear Aunt Sally”
there is a great decision-making tool called expected value (EV). Expected value is simply the long-term average result you should expect when you make the same financial decision over and over.
It made me wonder whether I was throwing money away by purchasing insurance policies for my flips, and whether it would be more cost-effective to “self-insure” my properties. Here were the assumptions I used:
A typical insurance policy for a flip will cost about $1,000.
On about 1 out of 50 flips (2 percent), I’d have a small ($10,000) claim.
On about 1 out of 200 flips (0.5 percent), I’d have a big ($100,000) claim.
On the rest of the flips (97.5 percent), I’d have no insurance claim.
What should I be willing to pay today for some amount of money in the future? (Present value)
Time value of money (TVM) is the concept that money in hand today is worth more than money in hand at some future time.
the best investors don’t just think about making more money; they also think about making money sooner.
I also received an inquiry from an investor. He told me that he really wanted to buy the house, but that he wasn’t going to have the money for about seven more months, as he was waiting for a seasoning period to end on another property he owned that he was planning to refinance.
Luckily, I was familiar with TVM, and I knew that getting the $120,000 now would be more valuable than getting it in seven months. I also knew that I could use the FV formula to determine how much that $120,000 would be worth to me seven months from now.
discount rate is often referred to as the “hurdle” or “hurdle rate.” It’s the hurdle we have to surpass to achieve our required or desired rate of return.
A good rule of thumb is that if NPV is positive, it’s an opportunity you should consider pursuing. If the NPV is negative, it’s an opportunity that should be ruled out (or renegotiated). This type of computation is not just useful for calculating the viability of owner-financed deals—it should also be used for BRRRR
let’s say that we didn’t currently have the cash to make this investment, but we knew that we could take out a home equity line of credit (HELOC) on our personal residence to acquire the $100,000 to invest.
When I (J) worked at eBay several years ago, everything would go through an NPV analysis.
Luckily, you don’t have to figure out the allocation of principal and interest yourself. Your lender(s) should send you an IRS Form 1098 at the end of each year indicating the amount of interest paid for the year, and this number will be used for your mortgage interest deduction. If you have multiple loans against a property, you will receive multiple Form 1098s, and each interest amount will be deductible in that year.
Depreciation is divided equally over a set period (the physical structure(s)) —27.5 years for residential property and 39 years for commercial property.
Examining the county tax assessment, you estimate the structure value is about 73 percent of the total property value. You purchased the property for $1 million, so you assume that the cost of the structure is $1,000,000 × 73% = $730,000.
Finally, you paid $13,000 in points on your twenty-five-year loan. Your accountant says that you can amortize those points at $13,000 ÷ 25 = $520 per year.
thanks to inflation, a dollar tomorrow is worth less than a dollar today.
Deferring your taxes for thirty years can cut the total hit to your net worth in half!
One of the simplest ways to benefit from real estate tax advantages is by using your personal residence exemption, also known as the Section 121 exclusion.
The personal residence exemption allows you to sell your personal residence and avoid having to pay taxes on the first $250,000 in gain ($500,000 if you’re married), so long as you have owned and lived in the property for at least two of the previous five years. There are many investors who take advantage of this exemption by selling their personal residence every two years.
If you have held the property for less than a year and a day, you will pay taxes at the short-term capital gains rate, which is substantially higher than if you have held for at least a year and a day, where long-term capital gains kicks in.
(CapEx) are technically not included as part of the NOI. From an accounting perspective. you would almost certainly find CapEx listed below the NOI line.
“Capital Reserves” or “Replacement Reserves.” This is just a fancy name for expected capital expenses and is a placeholder for the amount of CapEx expected to be spent in a given year on the property.
we’ll often find that buyers will include CapEx above the NOI line (to reduce NOI and the perceived value), while sellers will include CapEx below the NOI line (to increase NOI and the perceived value).
operators who raise outside capital from other investors, like in a syndication, will need to define the hold period up front to give investors an idea of when they can expect their money back.
More likely, the one with a higher cap rate has additional risk associated with it. Perhaps the property has a lot of deferred maintenance (needed repairs), which poses a risk to a new owner. Perhaps it’s in a pocket of town where there tends to be more crime. Perhaps it’s just a little farther from public transportation, making it less desirable for tenants.
instead of assuming it’s a great deal, you should instead be asking yourself what is wrong with the property.
At the time of this writing, I (J) am buying large multifamily properties in the Houston, Texas, metro area. I’m looking for properties that are at least 150 units, built after 1980, class B properties, and close to downtown Houston.
Want a Tesla that’s going to cost you $800 per month in a car loan? Buy a rental property (or several rental properties) that will generate $800 per month in income.
a percentage gain followed by an equally sized percentage loss results in less money than the original sum.
AAR simply averages the positive and negative returns, it counts both of them equally. It treats negative returns as no worse than positive returns—but as you now know, they are! For this reason, any AAR calculation that has a negative return for at least one period will overestimate the growth rate.
CAGR is well suited to measure the long-term gains from any type of real investment where profits can be reinvested, such as traditional rentals, BRRRRs, short-term rentals
CAGR is not meant to calculate returns on investments with multiple inflows and outflows. For that, we’re going to need to use another metric, IRR, which can consider the TVM of many inflows and outflows over the hold period of the investment. apply the XIRR( ) formula to the columns
you may hear IRR referred to by different names—on your mortgage truth-in-lending statements as “annual percentage yield” (APY) or as the “effective interest rate” of a loan.
those who invest in development projects or rehab properties, IRR is the preferred metric.
rely on CAGR over ROI or AAR in any investment where profits can and are reinvested.
We don’t paint a bathroom a specific color because we like that color—we paint it the color that will generate the most income.
Page 270 excel
learn about “capital stacks,” a helpful framework to visualize how real estate deals are financed
Payment is always made starting from the bottom of the stack and finishing at the top. Those lower in the stack get paid first and therefore have less risk. Page 285 excel.
We sometimes refer to equity that is lower in the capital stack—and that has a higher priority for payment—as “preferred equity.” When profits are paid out, preferred equity gets paid first. Melissa holds preferred equity over Brian’s common equity.
A credit partner brings their credit to a partnership, enabling the partnership to take on more debt than an investor could qualify for on their own. For example, if Sarah has several mortgages in her name and banks are now hesitant to grant her another loan, she could partner with someone who has good credit and less debt in their name. That way Sarah gains access to debt financing she couldn’t get on her own, and her partner gains access to Sarah’s experience owning several properties already.
Page 304, 305 excel.
three primary types of debt financing used: term loans, lines of credit, and revolving debt.
If you’ve ever heard of a 7/1 ARM, for example, that means that the initial interest rate is locked in for seven years, and then the rate is adjusted every year after that for the duration of the loan.
If you’re buying a rental you intend to hold on to for a long time, and if you can lock in a relatively low interest rate, it likely makes sense to get a fixed-rate mortgage. If you’re using a BRRRR strategy and intend to refinance in a year or two, you could get an adjustable-rate mortgage to take advantage of the lower initial interest rate and refinance well before you take on the risk of having your interest rate adjusted.
the term “hard” in hard-money lending refers to the fact that the loan is secured by a hard asset, like a piece of real estate.
If you have poor credit, are self-employed, or have too many personal mortgages already, seller financing could be a great opportunity.
If you want to fund a rehab, purchase a new property, or anything else, a line of credit is a low-cost form of debt financing you should consider. But not everyone is eligible for lines of credit. In exchange for the flexibility the bank provides with a LOC, they often look for very creditworthy businesses and individuals, or ask for collateral, like with a home equity line of credit (HELOC).
Principal is the amount of money borrowed from the lender. Interest is the lender’s profit.
you may have a credit card that charges an interest rate of 20 percent on any unpaid balance. However, when all the fees are factored in, the amount you wind up paying (your APR) is closer to 23 percent.
the result of which is called an amortization schedule.
many investors will look for loans with the longest amortization period, even if there is a balloon payment associated with it.
Page 335 chart.
strength of the borrower (e.g., credit score, investing experience, total assets)
Most commercial lenders will look for a DSCR of at least 1.2 to 1.3.
Generally speaking, the higher the loan constant, the more the loan costs you, regardless of the interest rate. When you have multiple debts—whether it be mortgages, car loans, or student debt—and you are deciding in what order to pay them off, you should focus on those with the higher loan constants first.
If you’re doing a good job of maintaining your properties and consistently improving management efficiency, hopefully your rents are increasing faster than your expenses.
return on equity and cash-on-cash return measure how much cash flow is produced for each dollar invested into a deal. But which one should you use, and when? As we said in Part 3 of this book, COC is a great metric to evaluate cash flow at the time of purchase. As a quick refresher, COC = annual cash flow ÷ cash invested. It’s best used at the time of purchase because it factors in up-front costs like your down payment and any initial out-of-pocket expenses you incur to improve the property.
if you want to build wealth as quickly as possible, you need to reinvest your profits.
Selling isn’t always the best way to boost ROE. In these cases, an alternative is through a refinance.
Refinancing a property allows the owner to essentially “reset” their mortgage. There are two ways to do it: traditional refinance or cash-out refinance.
We recommend that each year, you sit down and calculate ROE for every property in your portfolio. Then, compare those ROE rates to what you could get from refinancing or selling your properties, and determine whether you could deploy your equity more efficiently.
1. What type of deals are right for me to achieve my goals?
2. What returns do these deals need to offer for me to achieve my goals?
Most of us aren’t born wealthy. At some point, we need to start earning money to survive. And the most common way of doing that is to trade our time and effort to get it. In other words, we get jobs.
Jobs are—for the most part—transactional. We agree to provide our work in exchange for a lump sum of money. That lump sum may be in the form of hourly compensation, a salary, a fixed fee (like consulting), or a commission (getting paid based on performance and results).
With real estate, nobody is fixing the return on your investment. If you are good at finding undervalued properties, you can generate higher returns. If you’re a good negotiator, you can generate higher returns. If you’re good at managing your properties efficiently, you can generate higher returns. If you do your research and buy in the right place at the right time, you can position yourself for higher future returns. If you renovate your properties correctly and attract great tenants, you can create higher returns.
a promissory note (it’s a promise to repay the loan)
non-performing notes as those where the borrower has stopped paying, or is behind on payments.
depreciation means a reduction in the value of an asset over time. The physical structure in a real estate investment (as opposed to the land it sits on) will deteriorate over time. The IRS recognizes that there is a cost associated with maintaining the physical asset, and they compensate investors in the form of a tax deduction known as depreciation.
The interest you pay on your mortgage on investment properties is fully deductible against income.
Capital gains exclusion on the sale of a primary residence. If you live in the property for at least two years, and if the amount of the gain is below certain thresholds, you can literally earn up to hundreds of thousands of dollars on a sale without owing anything in taxes.
if we know that a new roof will cost $10,000 and will need to be replaced every twenty-five years, we can estimate the annual average cost for that roof to be $10,000 ÷ 25 = $400.
Page 459 excel.
The rule states that—on average—the NOI for a single-family investment will be about 50 percent of the gross rents.
when evaluating a cash-flowing rental property, we’re always looking at all four of the returns we might receive from the investment: 1. Cash flow 2. Appreciation 3. Amortization 4. Tax benefits
we can look at the cash-on-cash return (COC) metric.
Dig Deep
Keep in mind that COC is a good indicator of our annual return early in the project.
Excel provides a function (CUMPRINC) that will allow you to calculate the amount of equity— through principal paydown—being accrued over time.
Because we will likely pay the depreciation savings at some point in the future—when we sell—we prefer to think about these savings as an interest-free loan from the government between the time we save the taxes and the time we eventually have to repay them.
The second reason is that while prices do tend to increase over time, so do expenses. In many parts of the country, we’ve seen 2 percent to 4 percent average annual price increases in real estate over the past century.
To assume rents or values will outpace inflation in the long term is risky and uncertain
using a loan (conventional, portfolio, hard money, or private loans can all be used), purchasing with your own cash (or that of your friends and family), or bringing in a partner to provide the cash.
One of the big benefits of being able to increase value through renovation is not just that we can get more equity out of the property, but that we can do so without increasing LTV (which would increase risk). Some investors will refinance after renovation, using loans that provide significantly higher LTVs; we would caution that the BRRRR method shouldn’t be used to overleverage a property or a portfolio.
keeping our loan-to-value ratio (LTV) at 75 percent—a relatively safe percentage, in our opinion.
September 22, 2023
This book is like drinking from a fire hose of real estate formulas. As I have learned to analyze deals more and more, I have created a spreadsheet to help me analyze whether or not deals are viable opportunities. Obviously, cash flow is the one that feels best, but there are layers of metrics inherent in real estate that can help you evaluate if you are successfully generating wealth. Reading this book straight through was probably not the best approach, but now that I have, I am going to treat it more like a reference book. It is very well written and pretty easy to understand considering how much math is involved. I recommend this book, but it is not going to be for everyone.
July 18, 2025
This was a great resource for foundational knowledge when analyzing deals. However, some of the concepts could have been explained a little more thoroughly. Also, some of the examples used had very unrealistic numbers even for 2022 when the book was written. Early on in the book, there was a miscalculation that I had to Google to find out they noticed the mistake after publishing, and I assume they have updated for subsequent printings. All in, I will definitely use this book as a reference when analyzing future deals, and I am happy I found Bigger Pockets when I did.
December 6, 2022
I invest in real estate. I haven't read too many books about investing in real estate, but the ones that I have read didn't seem helpful. This book is different. When people tell me they want to get started on real estate and want to know a good place to start, this book will be on my short list of good places to start.
February 10, 2025
Fantastic resource
This book is a great resource for new and seasoned real estate investors alike. I’m very glad I found it. Be sure to add this to your real estate and investing library, and use it often.
This book is a great resource for new and seasoned real estate investors alike. I’m very glad I found it. Be sure to add this to your real estate and investing library, and use it often.
December 29, 2022
great book
This book contains tons of information, formulas and expanses to put your road to success on the right path. Thank you!
This book contains tons of information, formulas and expanses to put your road to success on the right path. Thank you!
January 3, 2023
Better than expected! Good book for anyone who is running analysis on property to buy or anyone who owns a property and is interested in all the ways to calculate returns.
January 19, 2023
This book is the “gospel” of real estate investing. It will serve as my handbook and I’ll be working to memorize most of it.
February 6, 2023
Excellent work on this book!
This book had tons of great meaty points in it. I may need to re read to understand all the calculations better though. Thanks Dave Meyer and j Scott!
This book had tons of great meaty points in it. I may need to re read to understand all the calculations better though. Thanks Dave Meyer and j Scott!
March 28, 2023
Quite and exquisite and profound way to understand real estate investing. Must read for the freshman investor. The new bible on RE analysis.
April 30, 2023
Excellent
A good reference. I will come back to re-review many of the concepts discussed. Highly recommend. Best real estate investing book
A good reference. I will come back to re-review many of the concepts discussed. Highly recommend. Best real estate investing book
June 7, 2023
Good but nothing like brrrr
September 7, 2023
Definitely a reference to keep on the shelf. I don’t know that I fully internalized everything, but the examples helped to clarify.
January 21, 2024
A very helpful guide for analyzing real estate deals. Includes just about any calculation you could want to make.
February 3, 2024
Really good principles but pretty basic
Read
October 25, 2024it was a great book and I learned a lot from reading the book.
December 20, 2024
The author articulates well the information needed to analyze real estate deals. Amazing educational content.
February 12, 2025
很详细的数学。最后拿作者真实的案例来分析deal还是很好的。如果只是房地产当副业的话，可以不用每一章都看得很仔细，因为有些metric是比较专业的。
February 1, 2023
There was a bunch to digest in this book. There are a lot of formulas to assist on your investing journey. This book serves as a good tool to assist in analyzing your investments.
January 5, 2023
A lot to swallow but a fantastic resource for getting in to the nitty gritty numbers of real estate analysis/investing! I will definitely be referencing this book quite often throughout my real estate investing journey.
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