Scott Dillingham: 00:30

Welcome Back to the Wisdom Lifestyle Money Show. I'm your host, Scott Dillingham. Today, I'm going to be talking to you about how to analyze a rental property. So anybody can go out there, you can meet with a realtor, you can go put an offer to purchase on a property and you can get a rental property. Does that mean it's a good rental property? Probably not.

Scott Dillingham: 00:49

I think a lot of investors, they get analysis paralysis. Which is pretty much where you just keep analyzing property after property. And you've run so many numbers that it's hard for you to actually make a move and decide what number you're satisfied with for a return on your investment. For any type of smaller properties, so from, single units to 4 plexes, 6 plexes, I think it's always smart to analyze how much cash flow you want per month, per door. Well, that's a strategy that I personally do.

Scott Dillingham: 01:25

When you have a target in your mind that you're satisfied with, when you analyze a property, you're bound to find ones that work, where if you're always just comparing and what one's best and you're you're struggling and you're looking at all these properties. A lot of times investors end up not even making a move and they just get stuck because they're again, analysis paralysis. They're analyzing too many things. And it's just not, productive to moving forward. You always want to set a number.

Scott Dillingham: 01:54

So then when you analyze a property, you can say, hey, that meets my number or no, it doesn't. And then you use that as your your basis and your decision on if you're gonna move forward. And now we have actually a cash flow analysis, a rental worksheet that we we give away for free. So I'll give you, instructions near the end of this on how to get that. But what we do is, and this is, I use the same tool personally for myself and I share it with all my clients, is we run the numbers, right?

Scott Dillingham: 02:20

It's very important to do your due diligence. And I won't talk about due diligence and how to find the correct details and all the other things like that. But it's important that you use and run these numbers using accurate numbers. Right? Because you could run some numbers arbitrarily and then discover that they're not true and correct.

Scott Dillingham: 02:41

And then that changes the whole picture. Okay. So we're going to dive in the second part on how to, find out the property's real numbers. But generally what we'll do is we'll start with the rental worksheet where we run the numbers. And the very first entry on there is number of units.

Scott Dillingham: 02:59

So this is something that's very important. You want to input only legal units. It's very often you'll find a single family house with an in law suite and it's being promoted as a duplex, but it's not a duplex. Right? It's a single family home with an in law suite.

Scott Dillingham: 03:16

Now, because the zoning may not support duplex status, what happens is the city and this kind of this works pretty much any city that, in Canada that you're considering buying in, they'll look at the property and they'll say, is the owner of this property using it to its legal and right use? If the answer is no, they can put a restriction on you. So you cannot even rent that second unit. So imagine buying a property and you're running the numbers and you're like, oh, the property meets my numbers. This is awesome.

Scott Dillingham: 03:48

I'm moving forward. And you do everything you can to buy this property only to discover the city will only let you rent half of the building. It would be absolutely terrible, devastating, and it can financially bankrupt people if they're not prepared properly. So you wanna make sure it's legal units. Okay.

Scott Dillingham: 04:08

And there's many ways you can find out if it's legal. That's a conversation for another day, but you wanna find out the legal units. And then the next input is the monthly rent. Right? So you put in the rent and, the calculator we use automatically factors in a vacancy.

Scott Dillingham: 04:24

Now it's best to use anywhere between 4 to 8% vacancy, and I would do it even if your market has a lower vacancy than that. Now, obviously, if it has a higher vacancy rate and you let rate put the actual, if you're if you don't know the rate, use 4 to 8% for your vacancy rate. Now what the vacancy rate is that is how many properties in the city are vacant. So So out of a 100% of the the homes, how many are vacant? K?

Scott Dillingham: 04:51

And with this number, lower the number, generally speaking, the hotter the rental market, not always the case. Depends on jobs and all these other things. And sometimes the numbers could be short term, right? Like for an example, we have a major bridge being constructed. So a lot of out of town workers are here, so it's going to help lower the vacancy rate.

Scott Dillingham: 05:12

But is that our true vacancy rates? Or when the bridge is done and the workers move out, is that the real vacancy? I believe the real vacancy rate excludes the out of town people that are here for different projects. Right? So you wanna run that vacancy number because then it allows for some wiggle room.

Scott Dillingham: 05:30

So you're looking at the real numbers, right? Because you will have months where the property is empty and this calculates a percentage of that. Okay. Now again, with vacancy rate, you could do it. You could analyze it based on your specific property.

Scott Dillingham: 05:49

I like to use the market average as a whole, especially if you're investing in a new market. So I look up the vacancy rates for the city, not an individual neighborhood. So you want more of an average. Okay? And then, from there, you also input if there's any additional income on the property.

Scott Dillingham: 06:07

Somebody renting a garage, an extra parking spot. Is there coin laundry? Right? Are these so you add these other things in, and this will help you figure out the monthly rent. For the expenses on the calculator here, we have property management fees.

Scott Dillingham: 06:22

So in previous episodes, I talked about how you should always have a property manager manage your property, even if it has one unit. A lot of times people wanna take that upon themselves because they think, oh, it's just one. I can do it myself, but that's where things go wrong because you don't know the ins and outs to screen the proper tenant. It's super important to include those fees and to have a property manager. You want to include repairs and maintenance.

Scott Dillingham: 06:47

A lot of people will buy properties even if they're fully renovated and they won't factor in repairs and maintenance, but you always should. There's no way to tell if the contractor did all the work perfectly. And after a quick month, maybe 2 months of, use from a family, what's gonna go wrong. Those brand new toilets break like the sinks. Maybe they didn't connect the drain properly.

Scott Dillingham: 07:11

Right? There's so there's all these issues that you cannot foresee when the renovations are complete until you start using the property. So you should always factor in repairs and maintenance. Obviously, if the property is fully renovated, you can factor in less than if it's an older property. But don't omit that even if you've fully renovated the property, you need to factor that in.

Scott Dillingham: 07:31

There's always going to be random stuff that comes up. Next in our worksheet is we calculate property taxes. This is a monthly expense rate. So we're trying to find out our monthly cash flow. So you just take the annual property tax amount divided by 12.

Scott Dillingham: 07:46

And that's what you didn't put into the worksheet. Next would be home insurance. Your home insurance, they can tell you what the costs are per month. And then you take that monthly figure and you input it into the worksheet and that will help you to calculate that. Now utilities, this one can be a bit of a challenge because every tenant has different usage.

Scott Dillingham: 08:06

So usually when you're buying a rental property, you can ask to see the sellers past 2 years utility history. If they don't have the bills, you can ask for the 2 years t one generals. Now that's their tax return. Tell them, like, cover all the other parts, but just show them the utilities of the property. And I would factor in those.

Scott Dillingham: 08:26

Right? Because you don't know what the tenants are going to use or not use. And we always try to make all of our properties energy efficient, We'll buy the highest efficiency furnace, central air appliances. I'll even buy, can go to DHgate and you can buy bulk LED Edison style light bulbs. You can get them like as cheap as a dollar a light bulb, where if you're going to a home depot or your grocery store or whatever, it could be 5, 5 to $10 a light bulb, depending on the light bulb.

Scott Dillingham: 08:56

So I'll buy them in bulk, right? For all my units, you can even choose a Canadian or American manufacturers. You can still buy local. You don't have to buy from China or wherever. If you want to buy North American, you can through DH gate.

Scott Dillingham: 09:09

And again, you're buying in bulk. So you get that huge savings, right? Replace all those light bulbs with energy efficient light bulbs, to help bring down the utilities. Now we have to take a quick pause. We'll come back, I'll finish what's on the worksheet and then we'll discuss how to determine the correct rent when you're purchasing a property.

Scott Dillingham: 09:29

We'll come back to the show. So I'm going to continue where I left off, because we're working through the rental worksheet to determine a property's cashflow. The next thing you want to include in the expenses is the professional fees. So that's your lawyer to close it. Right?

Scott Dillingham: 09:44

And your paralegal, if you need to process an eviction, your bookkeeper for adding all this up. Eventually, it's smart to have an accountant. Right? If you have multiple properties, you wanna have somebody that does your taxes right to make sure you're not paying more taxes than you need to. So all of those fees, right?

Scott Dillingham: 10:00

Add them in there so you can properly calculate the cashflow. And then of course, if there's any other random expenses, monthly expenses, be sure to include them. Sometimes there could be high speed internet, that type of thing. And that's quick tip, right? If you can include things like that, generally speaking, you can raise the rents.

Scott Dillingham: 10:18

So it's more effective in multifamily homes, But if you include high speed internet on say a 4plex, you'll get a lot more rent for the property. Because you can charge everybody, you can call it $50 more and just say it includes unlimited internet. Right? So you're getting $200 a month for the, like, extra rent because you're including the high speed Internet, but the unlimited Internet plan could be only a $100 a month. So it's an extra $100 a month cash flow to you.

Scott Dillingham: 10:46

Not huge, but if it's a tight market and every dollar counts, it it all adds up. We like to include that. So then at the this would be the end of the expenses. From there, it shows you the calculator shows you your net operating income, which is your total income. Then it subtracts your total expenses.

Scott Dillingham: 11:08

And then the net operating income is a profit that's left. Now beyond that, if you're looking for cap rates and things like that, we've got a spot where you can input your desired cap rate, what the purchase price of the property is, and it will actually tell you what your, the actual cap rate is of this property. Some investors talk about cap rate on smaller properties, but usually the lenders, they don't, they only talked about cap rates on the larger properties. So it's something that you don't need to always focus on depending on your property style. Now, lastly, so those were the, the net operating income is the property income minus the property expenses.

Scott Dillingham: 11:49

Now it excludes mortgages, right? Because some people buy properties cash, some people have a mortgage, like nobody knows exactly what your financing is. So the net operating income does not include the mortgage. So then in the mortgage section, obviously you input your mortgage amount, what your monthly payments are, your interest rate, and your amortization. That'll calculate all your mortgage payments.

Scott Dillingham: 12:14

And then at the end, you can see your total monthly cashflow and even annualizes your cash on cash return. So you can see your exact profits, that you're making. So it's a really cool calculator that we use. Again, it's free for anybody. So to get it, all you have to do is go to the Canadian real estate network.

Scott Dillingham: 12:37

That's our education platform where we've put out more than a 1000 articles, all for real estate investors. But on there, right when you go on the the main homepage, there's a spot for download. So I'm just pulling it up myself here just to tell you exactly what it says, so you don't miss it. So it just says, free downloads off to the left side. If you're viewing this on your phone, it'll come up right away.

Scott Dillingham: 12:59

And it says, for downloadable investor resources, go to our download page. So when you're there, you just input your email and your first name and, it'll email you the, investor toolbox success kit. So in there, we've got a whole bunch of, phone numbers to to reach out to. It's got the cash flow analysis. Talks about joint ventures as well.

Scott Dillingham: 13:22

We've got some landlord tenant board links. We dive into our favorite investment strategy and we also break down the types of different rental properties and strategies. That's all included for free in the kit. Again, there's no obligation here. We don't spam.

Scott Dillingham: 13:39

We will send, emails here and there just with some updated real estate tips and info, but there's no spam, no promotions. But in it, you can get all those free resources. So once you sign up, there you'll get emailed and then that'll go to you right away. It's instantaneously. And even if you unsubscribe, like it doesn't matter.

Scott Dillingham: 13:58

Just get the rental worksheet, run the numbers, and, and make sure you're not making mistakes. When you buy a property, it's very hard, to accurately run the numbers because a lot of times on the MLS listing, they'll list profits and things like that, but they're not including all of the expenses. And sometimes even the rental income is not accurate at all. Sometimes I've found they've used, like, the market rent when they talk about the profits, but the leases don't actually support that amount. Times they had a higher lease and the tenant damaged the property and the landlord knew they were selling, so they didn't fix the damage and they re rented it out for cheaper.

Scott Dillingham: 14:40

Like I've seen everything. What you wanna do is you want to get the landlord's rent roll. And again, I would ask for the T one general or bank statements or bank deposits to prove the rental income. Because a lot of times, and I hate to say it, but there's, there are sellers that are, their landlords are busy and they, provide information, to their listing agent. And it's not always accurate.

Scott Dillingham: 15:08

At least if you check the bank statements, you can match up the deposits with what's on the leases. And in fact, that's what the lenders do. When they're looking at your income on your application, when you're applying for lending on a rental property, When you're buying it, usually they'll have the appraiser tell us what the billing can rent for. But once you own it, they want to see your leases. But beyond that, they also want to see your bank statements.

Scott Dillingham: 15:35

That's something new that came out with COVID. And I think the reason for that was there was a lot of tenants that couldn't pay the rent. During lockdowns and things like that. The lenders started getting smart and saying, okay, we've supplied a lease. They've been there for 2 years, but let's see if they're paying the rent.

Scott Dillingham: 15:49

So they get the bank statement. So that's what the lenders do. So as a buyer, I would play the same game, get the same documents, and that will help you along the way to make sure that the income that they're stating is true and correct. And I would also ask for proof of their expenses because they might say, oh, the utilities are not included and then you discover they are included Or they'll state what the utilities are, and then, oh, crap. We forgot a bill.

Scott Dillingham: 16:17

So they're actually more money than what we thought. These things come up all the time. And I can't say if it's intentional or whatever. I don't want to put point fingers and say people aren't honest, but, I do know that people make mistakes and, the numbers don't lie. So act like a lender, get the documents to prove it.

Scott Dillingham: 16:35

You are buying the house and I've done this for every single property that I've bought, that I felt the information was not accurate. I prefer to buy them vacant so I can put in my own tenants and I can control the utilities if they're shared meters, because I can separate those meters. And again, we can do those property upgrades to make it more energy efficient. The insulation appliances, LED lights, like all that good stuff. So you can control your expenses.

Scott Dillingham: 17:05

So in a sense, if you're buying it vacant, it doesn't really matter what the other landlord or owner expenses were because you can create it and you can optimize it. So you don't have the same expenses. But absolutely you want to check everything. Just going by the MLS listing, I find it is practically never accurate because things are missing that should be there. K.

Scott Dillingham: 17:30

So just word to the wise just to help you along your journey. And then lastly, when you are running the numbers and about to purchase a property, go a couple houses down from where you're looking to buy and knock on the door and just say, listen, like I'm interested in buying this property a couple doors down. What are the tenants like? What's the landlord like? And you'll find out if there's trouble tenants or if things are not quite as they, appear the neighbor who's upset with terrible tenants always tell you that, they don't like what's going on over there and you'll get the download.

Scott Dillingham: 18:08

So once you know the details about the property, you've run the numbers and you've spoken to the neighbors and everything is good at that point then, and only then is when I would recommend moving forward with purchasing that property. So I really appreciate your time today. I hope, the episode was helpful for you. Again, the download is there. It's free.

Scott Dillingham: 18:30

And if you need to reach our office and have any questions about investment property financing, just anything rental properties in general, please give us a call. Our office line is 519-960-0370. Looking forward to connecting with you, and have a great day.