Episode #28 – Rent & Flip Analysis Spreadsheet for Wholesalers & Investors
Welcome to another edition of EarlToms podcast. Today, I’m going to help everyone out because there’s a there’s a lot of information out there about how to value a house. So what I’m going to do is basically talk about a spreadsheet that, that I use, you’ll find it on EarlToms website.
Now, put a link below so that you can find it. But there’s, there’s a big misconception about ARV things of that nature, your your, your main purpose, when you determine the value of a property is what is its highest and best use. So in order to kind of help you figure out what’s the highest and best use, I’m gonna, you know, talk about this, this spreadsheet a little bit, because it gives you the, the either or, or, it’s, it’s a way to look and see if something will make you the most money renting, or if it will make you the most money flipping, and that is the highest and best use whatever is going to make you the most money is the highest and best use. So what you are looking for, is what’s going to make the investor that you’re trying to sell this property to the most money. And that is going to be a direct correlation to what you put it under contract for. So let’s take for example, you go to an area that flipping or people are buying a house, getting a mortgage on it, and living there, you know, for 30-40 years putting the roots down, or you’re in an area where more people rent than they actually split, you’re going to have two different values in there. Now you’re going to have the sales price, that’s, that’s always gonna be there, a sales price is always going to be there. But what is going to make the investor the most money, that’s what the investor is actually looking for. So to help you all out, we’re going to kind of go through this spreadsheet. Like I said, you’ll find it on EarlToms.com and i’ll i’ll put a link to it below. But what you need to focus on is not what Zillow says everything is selling for, because Zillow doesn’t tell you whether it’s going to be rented or whether it’s going to be sold as as an owner occupant.
Now, you’ll see a good bit in the sales price reflected in that. So when you get in these areas with a lower sales price, usually that’s going to that’s going to tell you that it’s being rented. If you go into areas with a higher sales price, typically, that’s going to tell you that it’s being sold to an owner occupant, because you can’t make the most money, renting a house with a higher sales price. So let’s say that you’ve got a $200,000 house, but you can rent that for $2,000 a month. That’s not making a lot of money, in essence does a 10% gross return. There’s not many investors that’s going to look for that. So let’s say that you go in on this $200,000 house, you you look at it in terms of I need to get this to leave the person that I’m selling the house to enough money to be able to turn around and pay the closing costs, the real estate agent commissions do the repairs, and still make money. So let’s let’s use an example of the $200,000 house, if we’ve got a house that needs $25,000 worth of renovations, that automatically puts us down to $175,000. That’s our starting price. So in my market, you have 6% closing cost and 6% agent commission. So that’s $12,000 for every 100. So if you’ve got a $200,000 house, you know that that’s now $24,000. So you’re you were at $175,000 with just the renovation. So even though it’s $24,000, we’re just gonna keep numbers even. So let’s take the $24,000 off of the $175,000. Now you’re at $150,000 before your investor ever makes money. That’s their that’s their cost, hard cost to make money. So what you have to sit there and realize is how much lower of that do I need to get so that the investor can make money that they’re satisfied with? An I’m able to actually make money too. So if you have an investor that says okay, I’m good with making $25,000 off of this house. Alright, that puts you down at $100,000 and $25,000 that’s where that’s your starting price. So whatever you negotiate below that is going to wind up being your assignment fee. Or if you double close that, that’s the money that you make. So you have to back into these deals. But knowing how you have to back into them, makes the biggest difference in the world.
Now what I do, I always take contracts with me. But that’s because I’ve done this for so long as far as appraising and things like that. So before I ever go out to a property, I have a good idea of what a house is going to be worth. And because I’ve done so many renovations and know what the renovation cost is going to going to be. So I can typically put something under contract while I’m there, people that are just getting in the business, I wouldn’t necessarily suggest that because you need to go put your eyes on it, then come back and compare what things are selling for what it could be worth, and get get a better idea and maybe come back and run this spreadsheet when you get finished. And then that will give you the opportunity to know what you need to put this house under contract for give you a better idea. So that you can make money and your investor can make money. And everyone is happy in this process. So this the spreadsheet has two different tabs on them. One tab is the rent analysis, and the other is a flip analysis. Now, there’s a lot of formulas on this spreadsheet. So if you don’t know what you’re doing, if it’s a if it’s a sale inside this spreadsheet that has a formula, don’t change it, or go through and save a hard copy of this spreadsheet, and then make another copy that you’re going to play with and get familiar with it and things like that. So that you can kind of figure out what I’ve done. because really what I’ve done is actually do a spreadsheet, like I would be appraising this. And it’s very, very, very in depth and complicated. So like I said, if you don’t understand what I’m doing home here, don’t alter this spreadsheet with the formulas in a sale unless you have a hard copy that you’re not working off of. Because if you mess it up, it’s gonna mess the entire thing up. But the sales that are just basically blank, you can go ahead and play with them. Because there’s like site property taxes, there’s there’s nothing in the cells that have a formula involved in property taxes. So let’s you know if you can go in and edit your property taxes, things like that. But one thing that that confuses a lot of people about this spreadsheet is is at the very top, you’ve got a low yellow cell, that you can have either low, moderate, middle, or upper end. And what that is, is a census tract. Typically, your your, your census tract will tell you what the demographics are everything about that neighborhood. So what if let’s say that you’re in a high end area, where you need to use the upper, but if let’s say you’re in a low income area, there’s a good bit of poverty in there, things like that, you need to click on that sale, and it’ll have a pulldown screen, that’ll give you the different options. So you need to change where you are based on the census tract and your demographics to reflect your area. And what that’s going to wind up doing at the very, very beginning, is it’s going to change the entire spreadsheet formulas and everything to reflect the area that you’re actually in. So like I said, if you’re not comfortable with a lot of in depth things, do not alter this spreadsheet, because if you do, you will mess the entire thing up. But you’ve got the you start out basically with the appraised value on the rent analysis, the rent amount, what you think it would rent for things like that. What this spreadsheet is designed to do is basically show a investor going and buying a property, getting it stabilized and then refinancing. That’s what probably 60 70% of investors do. Most of the hedge funds do it. It’s it’s just they just reuse the money. They already have to be able to continually buy properties. It’s just a big cycle that they all go through. So even though you may have some buyers that are going to sit there and just pay cash on everything, that’s fine. That’s great. That’s wonderful. Let them do it. This is going to tell you Whether or not, the majority of your investors would look at it, and buy it based on these numbers.
So and I’ll tell you how I present this a little later in the in the episode, but what you’re looking for on this is really trying to figure out whether or not this is a good, a good buy, it’ll help you kind of cheat and see, okay, I need to put it under contract for this price based on the appraised value in the event, they’re going to get a loan or they’re going to be able to refinance it back out, things like that. And, and the good thing about this spreadsheet, is there’s a tab at the very bottom of the rent analysis that will tell you don’t need to buy, do I need to double check this? Does it need approval, or do I need to just walk away from them and at this price, it does that for you. And what it does, in the middle of the upper 12% is basically the buy threshold. Because most people that are going to buy to rent and an upper area or mid area, they know that that’s really going to be a good return on their on their money on their purchase. But when you go to the moderate, or the low, your buy percentage, your return is 20%. So if it’s lower than 20%, it’s going to be sketchy for an investor to look at because these are gross percentages, now the 12% and a 15%, and their gross percentages. So when you go in, and you excuse me, their their net, I’m sorry, I didn’t mean to say gross. So when you’re looking at these deals, you know, if you can get something at 20%, in a low to mid moderate census tract, you’ve got a good likelihood of getting that deal. So if you go in on a on a middle and upper on a net of 12%, you’ve got a good, you’ve got a good likelihood of getting that sold. But what that also does is give you room with your investor to negotiate. Because if let’s say that they want 18% in a low to moderate area, you have that ability to go in there and sell it to him, because you’re not gonna miss that much money. But it gives you the leverage with your investors to negotiate, but you send it to them with this with this percentage, and this, you know asking price of what you’re trying to sell it to them. So when you go through the rent analysis, you’re looking at things like you’ve got the purchase price, the repair amount, you’ve got, you’ve got holding cost, because it is going to cost the investor money to hold the property until they can stabilize it, potentially refinance it, whatever whatever may be, you’re going to have insurance that I’ve stuck on here that it’s prepaid. A lot of investors, including myself, I’ll pay a three month premium or a six month premium, just to go ahead and get that out of out of the way, you’ve got the reserves, the cap acts on it. So what you’re putting back, you know, for in the event of repairs being needed, things of that nature. closing costs are involved in in the spreadsheet, and then you’re basically putting your taxes, you’ve got the escrow for the taxes in there. If a tenant is going to whatever your rent amount is, typically most investors do the same thing on the on the security deposit. So it factors that in as well. Then it goes through with with the mortgage only or things of that nature. And then it’ll sit there and tell you the equity of the property that you’re that you’re looking for, based on the demographic the census tract that you’re working with. And then it will give you a total cost basis, you know, to the side of it or whatnot. But when you’re looking at at the income and expense portion of it, where it gets into the net return, which a lot of people call cap rates, really it’s just a return a cap rate in a house is just a return. So you’ve got your vacancy factored into it, which is also a formula. The vacancy rate that I have entered in this spreadsheet is 6%. As typically good for a house. Depending on your area, you may want to change that you may not but again if you don’t know what you’re doing, I would I would be hesitant to alter it unless you have the backup that you’re you know not messing up. But it’s got other things sometimes you’ll have a fire dues. Your your insurance is going to go in this as well because these are part of your carrying costs that are Aside from the, the prepaid, you’ve got your annual taxes the fees to lease the property because your investor is gonna have to pay someone to to lease it or if they do it themselves, it’s still gonna cost them some money, whether it’s time gas, whatever it is, it’s still gonna gonna cost him some money, got management fees in it. The then you’ve got that hammered amortization expense, because it it is it just it costs money to, to finance these things, you’ve got something in here called bad debt, the bad debt percentage is 3%. Because sometimes attendance late, something goes on, the owner has to basically front the payment until they get it back in from the tenant. That’s part of doing business. So you, you have to factor it in. So once you get down to the very end, you’ve got a you’ve got an annualized profit for the for the house, that you’re going to wind up. So I pass it on to the to the investor. But then you’ve got your percentage, for the return on the investment that’s going to wind up being the net.
But what you also have, and this is one thing that most investors really pay attention to that most of most of wholesalers are not even paying attention to, if if not even aware that it’s a thing. But you have a tax effective return. And the tax effective return is basically what you can write off expenses, things like that. So that you can, we’ll call it make more money as a business, so to speak, not necessarily Own your annualized profit, but your it reduces the amount of taxes that you have to pay for your business and own that property every year. So you wind up actually able to keep money instead of paying it back out. Because at the end of the day, Uncle Sam is gonna get his, it’s just something that that happens. But you also have a return on the interest that you’re paying. Because every time you get a loan, you have to pay interest on it. So you’ve got to return. Only interest that your that your investor is going to going to wind up paying for the property that they have is basically the cost of doing business. But you’re looking at the income before the interest of what is basically the principal, how much money do you make only having to pay principal, and then how much are you making, because you have to pay interest. So real investors look at every single bit of this before they make a decision. So a lot of times when you think to yourself, this is a deal, I don’t understand why an investor is not buying it, this spreadsheet will tell you exactly why or why they aren’t buying that property from you, you have to be able to, to come up with a legitimate appraised value market value, a legitimate cost of repairs, legitimate taxes, expenses that you can fill in. And if you and if you hit a good deal, at the very bottom, it’s going to have a big sale that’s highlighted, this is going to tell you by if you don’t hit the percentages your investor needs, it’s gonna say it either needs approval, meaning you didn’t do something right, or it’s not a deal, it’s gonna say cancel, again, meaning you didn’t do something, right. So it saves you a lot of time analyzing deals, figuring out whether or not your investor is gonna want to buy if it is a rental property.
Now, if it’s a if it’s a flip property, you’ve also got the tab that is the you know, the max allowable offer the MAO. So you’re, you have on this tab, something similar to what’s on the rent tab, but you’re looking at the things that are important to an investor when they’re flipping something. So an investor, if they’re going to borrow money, to be able to flip this, they’re looking at an interest rate. They’re looking at how many days is there, it’s gonna kind of be sitting there under under renovation. They’re also looking at how many days it’s going to have to sit on the market from when they list it to whenever they get it, get it closed. It’s going to have in there the real estate agent commissions, the closing cost, the loan to value, which is a completely different thing. So when they go in and they say, you know, Lima one, I need to finance this and they go Okay, we’ll give you 80 percent of the value, so you’ve got to put 20% down, that’s in there as well. So you’ve got things on this side of it, the contract amount, pray appraised value, what you think you’re listed for after, you know, you get all the repairs finished up. But what you’ve got in this one, as well as the closing costs, the holding cost broker fees, which are basically the agent Commission’s, you’ve got your monthly payments involved in it. Because if you’re having to hold it for, you know, two months, three months, you’re gonna have two or three payments involved in it. So you have to figure those in as well. But it gives you a total out of pocket for an investor, which basically the total out of pocket for the investor is going to want to be in their down payment, the repairs, if the lender doesn’t financial pairs, and the monthly payments, the prepaids, like we had before the insurance tax things like that to your escrow, and then it’ll give you an annualized profit and an annualized return.
But you have something that’s called a hard cost percent of the value, how much is that going to cost? That investor? That’s hard? Not variable. It’s a fixed cost, how much is it going to cost that investor to flip that house? So when they look at it, and they let’s say, you’ve got a hard cost of 60% is that a good and is that a good number for your investor is your investable. 30% is your investor good was 75%, you fail your investors out, and they want to leave you in the right direction. So whenever you are able to come across a deal, you’re helping them out because you’ve got all this information. And it also has on this on this flip analysis, a spot for you to be able to put in comps. Unless you know what you’re doing. I would not suggest putting those comps on the spreadsheet. Because what a lot of wholesalers do is make the mistake of putting the highest comps possible only when they send it to someone which nine times out of 10 are not actual comps for the house. So you’re making a suggestion, if you can get everything else right on this on this spreadsheet, whether it’s the rent analysis, or the flip analysis, but you messed those comps up. You’ve messed that whole spreadsheet up because that’s based on that’s based on what you have put your appraised value add. So instead of going in and looking for the highest comps that you can possibly find, be legitimate. do real comps, don’t fluff them put in there what this house is actually going to sell for not what you’re hoping your investor will believe. That’s how you ruin relationships. So when you go in on it, if you know what you’re doing, put legitimate comps on there, what what you’re looking for something that looks similar, something that’s in similar condition, something that has similar number of bedrooms and bathrooms, something that’s sold in the last three months, something that’s smaller and square footage, something that’s bigger in square footage, I wouldn’t go more than 10% on either side of it. That’s just me. So if you’ve got a 1,500 square foot house, your small conference 1,350 your large campus 1,650 once you start, if you’ve got a 1,500 square foot house, once you start putting a 2,000 square foot house on there, you lose all credibility whatsoever to an investor. So they know right then and there that you’re fishing for a number that’s not realistic. So you just lose credibility throughout this whole spreadsheet, all this work you did just makes you look bad. That’s all it’s gonna do. So one other thing about this spreadsheet, one thing that I did hesitate for you to mess with it is because both of these tabs will talk to each other. So if you put something in on the rent handle analysis, that’s actually on the flip analysis side of it as well. You don’t have to put it in on the rental on the flip analysis, the rent analysis will put it in on the flip analysis for you. So don’t that’s that’s, that’s one of the reasons I said unless you know what you’re doing. Don’t mess with the formula sales in this in this spreadsheet. But if you if you take a good approach with it, and you kind of buckle down and use these, both of these, these tabs if you use them to your benefit, you’ll look more credible to your investment. Because you’ll actually get in the habit of sending them good deals, because when you look at these things, it’s almost a way of saying, Well, I would buy this. So when you start sending these to your investors, a lot of times, they’re gonna sit there and go, Okay, that looks good. I mean, I don’t have any issues with that whatsoever, it doesn’t look like you really fluff numbers or held back on something, you, you put this down in an easy to understand way of this is what I can make, this is what it’s going to cost me, this is what I can sell it for, this is what I can buy it for, hey, let’s do the do the how I send it to the investors, as I basically open up a Word document, I fill the spreadsheet out. And then I’ll go through, it’s got both tabs, I actually have kind of like a border that goes around the information sections of them.
So I’ll go through and I’ll highlight that border. Because what I’ve done is on the right side of the border, I’ve got the mid moderate flow and upper sections. And I’ve got the cancel needs approval by on the right side as well outside of that, that will area. And I put the the decision by the needs approval or the cancel large so below it, so that you don’t have to include that when you send it to an investor. So what I do is I just highlight the area that’s in the border that’s inside the box with all the information of it. And then I’ll I’ll copy it, I’ll paste it over that Word document. And I’ll come over and do the same thing on the flip analysis. I’ll highlight that, copy it, and then own new page inside the Word document, I’ll put the I’ll put the information, I’ll put that on the second page on there. On the on the first page, I always put a picture with the address, you’ve got an area on the spreadsheet to put the address as well. But you’ve also got the area to be able to put in the bedroom and bathroom. So you’re getting a full picture of the area. Now you’ve got an area on both of the spreadsheets, I wouldn’t do it on the run analysis. But typically what I do is on that fourth page, as I go through and I make some notes, typically it’s about the condition what needs to be renovated. You know what I’m what I’m seeing things of that nature, I don’t get into too specific. Nine times out of 10, I don’t put in the description how much I think it’s going to cost to renovate, because it’s already in the different spreadsheets. But if you’re only if you know you’re only dealing with a flip, well, there’s no sense in sending the the rent analysis to the investor. On in that situation, you put the picture. The second page is the flip analysis. And then under on the third page, type in, you know, a small description like, you know, it needs new flooring, what I’m seeing in the areas, a lot of people are using hardwood, or a lot of people are using carpet, or a lot of people are using a metal roof for shingle roofs. vinyl siding seems to work in the area of need soldering, heat pumps, instead of you know, using natural gas, whatever you’re seeing in that area is typically what I go through when I put in that, you know in that area unless it’s a buyer that buys in, in the area all the time. And typically, if it’s a buyer, the buyers in the area all the time, I’ll put the picture in the whatever analysis I’m using. And I will even give them a description. Because they already know the area. So what they see in the analysis, you doing the work for them, but you always sin in that same email you send them, you know, the pictures, or if you use Dropbox or Google Docs, send them a link for the pictures. Because one thing investors do not like is somebody just shoot them a text or giving them an email, say, Hey, what do you think about this house? Here’s the address. Here’s the asking price, no information whatsoever? How is an investor ever going to make a decision? How would you make a decision on that? You’re going to come back and go, I need more information. You got pictures? Have you been to it? Do you have it under contract? What’s the deal? So you always look at it and think to yourself?
What would you like to get when somebody is presenting you a deal if you were the actual investor. And that’s why a lot of times you ruin the relationships because these investors are, you know, they’re they get tired of wasting their time when you’re sending a deal out to them. Here’s the address. Here’s the asking price, no pictures, no real description of what it needs anything like that. That half the time they’ll get to the point where they won’t even respond to you. So you always want to put more information up front that you possibly can To be able to give them the ability to look at something, make a quick little decision a little bit of whether they’re interested in it. So if they have the, you know, if they got the the front picture on the first page of the little PDF that you’re about to send them, because when you’re in Word, you just go down and save it as a PDF or you can just send it as a word, Doc, I mean, it is completely up to you. But you give them the front picture gives them a first impression, you give them the financial numbers, what’s going to be really important to them, and then you give them the pictures, because then they can see the full picture of what you’re trying to give them, because they looked at the financials and they see $25,000 in work. And then when they see the the link of the pictures, or if you send it in a zip file ever how you do it, then they can sit there and look at those pictures and say, Okay, I see about $25,000 or I see $15,000 or $30,000 or, you know, whatever it may be that you’re wrapping the presentation up for them. So you get a decision a lot faster, of whether they would be interested in it, instead of having to chase them down with 10 different emails, because you’re not giving them much information, you’re just sending them an address and an asking price. So you’ve wasted two, three hours you frustrated them.
So then when it gets come time for negotiation, you know, they’re in a bad mood, you did it to yourself, if you do it that way you’re doing it to yourself. So take what take this spreadsheet, do what I’ve done, what I’ve suggested, if if you’re in a in a mid middle area where it could go either way. So in both analysis, if you’re on a flip area, just send the flip analysis, if you’re in a if you’re in a rental area to send the rental analysis, I wouldn’t send the spreadsheet the way that it is simply because your investors will sit there and take it and go, Well, I’ll just start using this for all of my deals. And then when you start, you’ve kind of lost your your leverage with them. Because now what they’re going to wind up doing is they’ll send it to another wholesaler and say, Hey, I need you to fill it out like this. And then that wholesaler gets it gets this spreadsheet, they start sending it back to them. And you you’ve lost your height, I’m the one that gives you the best presentation, the most information. So now every wholesaler that’s out there is sending them the exact same spreadsheet. So you’ve gone from being number one to just like everybody else. So that’s why I always protect it by sending a PDF of it. And just give them a short little 2, 3, 4 page PDF. Link, have the pictures, you know, in the email, or actually in the PDF, it’s up to you, whichever you want to do. But I’ve always found that the more information that you can give up front, the faster your deals close, because your investors can make sound decisions a lot of times and be in the ballpark without even having to go out there and look at it. So it helps you in that aspect too. Because if your investors are going out there, and they haven’t seen pictures, they’re just taking your word that it only needs $20,000 worth of work. And then when they get there, the roofs falling in. It’s just it helps you get your deals close faster.
So the more professional you can be and appear that you’re giving them the best information possible, a detailed information about their money, because that’s really at the end of the day all they care about how much money are they going to make. So you go ahead and break that down for them. And they love you. So with that, I hope you’ve helped you kind of understand what what I’ve told you in this, run over to to Earl Toms calm and check it out. It’s it’s there for you if you want it. Every investor I’ve ever sent it to has asked me for a copy of it. And I refuse them every single time. Because I don’t want to be that that one that basically makes their life easy. I only want their life to be easy when they’re dealing with me. Because that makes me more money. Do you understand what I mean? So send that the PDF, Word document, whatever you want to do, but make sure they can’t sit there and pull this out and start playing with it to where they can take away your advantage because like what we talked about, on the last episode, the personal capital. This is part of personal capital. This is your knowledge. This is something that you have that no one else has. So this creates your advantage. And the more personal capital you can have with an investor more deals you’re going to you’re going to close and the more money you’re going to make.
But with that, we’re going to bring it to bring it to a close. If you want to get this spreadsheet, like I said, head over to EarlToms.com. We’ll post a link to where this spreadsheet is so that you can download it. But if you have any questions just shoot us an email, EarlTomsemail @ gmail.com. And and let us know what you think if if we can help you, we will because this spreadsheet is it’s complicated, but it’s simple to as long as you let it do what it’s designed to do. It’ll be super simple for you. But when you start trying to get in and change it, make it your way and things of that nature. It’s gonna get it’s gonna get complicated, you’re gonna confuse you. So I would like I said I would just change the sales that are in there that don’t have a formula and just let it ride. But we hope you’ve enjoyed this episode.
We’ll see you again in a couple of weeks. Thanks for listening.