Regardless of where you are in the business or what side of a transaction you are on, you have probably heard someone say they will have to “run the numbers” and get back to you. This is an important step in the process, but if you are not running the right numbers or calculating them correctly, you will be left with a property that can leave you exposed. It is fine to look at estimates or rough numbers when taking a preliminary look at a property, but before you decide to make an offer, you need to exact figures.
How many times have you heard “I think I can get $1000 for the rent” or I should be able to clean this place up for $10,000?” Between rehab estimates and housing expenses, if you are off even a little on either side you are setting yourself up for disaster. Mortgage or private money payments, interest, insurance, taxes, vacancy factor, maintenance, market rents and association fees must all be calculated correctly if you want a real feel of what kind of property you have. If you are looking at old tax numbers that have increased $1000 or so, you are looking at almost a hundred dollar difference. This may not seem like much in the big picture, but it could make the difference between a property that cash flows or one that you pass on.
There is no excuse for not to have the exact numbers on your deal. It can be easy to trust the appraiser’s tax number or the seller’s utility estimates, but it is up to you to verify them. Call the local town clerk’s office and get the updated tax amount. Reach out to your insurance agent and get a real estimate for what the insurance would be. Ask the seller for bills for any and all utility and housing payments. A home may look great until you consider there may be an extra $1000 a year on snow removal and yard maintenance and the rent you thought was $1000 is really $800.
If you are doing any work to the property, you need to get more than one estimate. Not only should you get an estimate for the property, it should be itemized so you know exactly where your money is going. You can allow for some overage, but once you get that estimate that should be your working number. Investing is based on exact numbers and if they are off it skews the rest of the process. If your rehab costs go over, they could cause you try to recoup that money through an increase in rent which may cause you to miss a month or two of rental income if the demand isn’t there. Every number in a rehab and rental property is connected to one another and has an impact on the bottom line.
There are many formulas and calculations you can use to see if they property makes sense. All that number crunching will not do you any good if you aren’t using the right numbers. Take the time and find out exactly what you are working with before you dig any deeper.