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.
Scott Dillingham: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. I think a lot of investors, 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.
Scott Dillingham:For any type of smaller properties. So from single units to four plexus, six 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. 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.
Scott Dillingham:They're analyzing too many things and it's just not productive to moving forward. You always want to set a number, but 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 basis and your decision on if you're going to move forward. And now we have actually a cash flow analysis, a rental worksheet that we give away for free. So I'll give instructions near the end of this on how to get that.
Scott Dillingham: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? It's very important to do your due diligence and I will 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:And then that changes the whole picture. Okay. We're going to dive in the second part on how to find out the property's real numbers. 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. So this is something that's very important.
Scott Dillingham: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. 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?
Scott Dillingham: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. I'm moving forward.
Scott Dillingham: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 want to make sure it's legal units. Okay. And there's many ways you can find out if it's legal.
Scott Dillingham:That's a conversation for another day, but you want to 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. Now it's best to use anywhere between four to 8% vacancy. And I would do it even if your market has a lower vacancy than that.
Scott Dillingham:Now, obviously, it has a higher vacancy rate and you let rate put the actual, if you're, if you don't know the rate, use four to 8% for your vacancy rate. Now what the vacancy rate is that is how many properties in the city are vacant. So out of a 100% of the homes, how many are vacant? Okay. 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.
Scott Dillingham: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, 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?
Scott Dillingham:So you wanna run that vacancy number because then it allows for some wiggle room. 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.
Scott Dillingham:You could analyze it based on your specific property. 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.
Scott Dillingham:And then from there, you also input if there's any additional income on the property. 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.
Scott Dillingham:For the expenses on the calculator here, we have property management fees. 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 want to take that upon themselves because they think, oh, it's just one. I can do it myself, but that's where things go wrong. Cause you don't know the ins and outs to screen the proper tenant.
Scott Dillingham:It's super important to include those fees and to have a property manager. You want to include repairs and maintenance. 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 two months of use from a family, what's going to go wrong.
Scott Dillingham:Those brand new toilets break like the sinks, maybe they didn't connect the drain properly. 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 fully renovated the property, you need to factor that in.
Scott Dillingham:There's always going to be random stuff that comes up. Next in our worksheet is recalculate property taxes. This is a monthly expense, right? Cause we're trying to find out our monthly cash flow. So you just take the annual property tax amount divided by 12, And that's what you'd input into the worksheet.
Scott Dillingham: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:So usually when you're buying a rental property, you can ask to see the sellers past two years utility history. If they don't have the bills, you could ask for the two 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, right?
Scott Dillingham:Cause 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 a can go to DH gate 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 $5.05 to $10 a light bulb, depending on the light bulb.
Scott Dillingham: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.
Scott Dillingham:If you want to buy North American, you can through DHgate. 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.
Scott Dillingham: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. Welcome 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 cash flow. The next thing you want to include in the expenses is the professional fees.
Scott Dillingham:So that's your lawyer to close it, right? 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 want to 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: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:So it's more effective in multifamily homes. But if you include high speed internet on say a fourplex, you'll get a lot more rent for the property because you can charge everybody even 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:Not huge, but if it's a tight market and every dollar counts, 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. And then it subtracts your total expenses.
Scott Dillingham: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 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.
Scott Dillingham:Now, lastly, so those were the the net operating income is the property income minus the property expenses. Now it excludes mortgages, Right? Because some people buy properties cash. Some people have a mortgage. Like, nobody knows exactly what your financing is.
Scott Dillingham: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. And that'll calculate all your mortgage payments. And then at the end, you can see your total monthly cash flow and even annualizes your cash on cash return. So you can see your exact profits that you're making.
Scott Dillingham: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. That's our education platform where we've put out more than a thousand articles, all for real estate investors. But on there, right when you go on the main homepage, there's a spot for download.
Scott Dillingham: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. And it says for downloadable investor resources, go to our download page.
Scott Dillingham: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 reach out to. It's got the cash flow analysis, talks about joint ventures as well. 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.
Scott Dillingham:That's all included for free in the kit. Again, there's no obligation here. We don't spam. We will send emails here and there just with some updated real estate tips and info, but there's no spam, no promotions. In it, you can get all those free resources.
Scott Dillingham:So once you sign up, then 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. Just get the rental worksheet, run the numbers 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.
Scott Dillingham: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. They didn't fix the damage and they re rented it out for cheaper. Like, I've seen everything.
Scott Dillingham:What you wanna do is you wanna 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. Cause a lot of times, and I hate to say it, but there's, there are sellers that are landlords are busy and they provide information to their listing agent and it's not always accurate. 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.
Scott Dillingham:When you're applying for lending on a rental property, 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. 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.
Scott Dillingham:The lenders started getting smart and saying, okay, we've supplied a lease. They've been there for two years, but let's see if they're paying the rent. 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.
Scott Dillingham: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. So they're actually more money than what we thought. These things come up all the time.
Scott Dillingham: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. 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.
Scott Dillingham: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. 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.
Scott Dillingham:Just going by the MLS listing. I find it is practically never accurate because things are missing. That should be there. Okay. So just word to the wise, just to help you along your journey.
Scott Dillingham: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 troubled 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 down low.
Scott Dillingham: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: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.