6 Numbers You Need to Know Before Buying a Rental Property

There are six numbers you need to know before buying a rental property. We run these numbers before we buy any investment, and knowing all six gives you the highest chance of making money instead of purchasing a headache. We’ll give you the full list of the six most crucial real estate numbers and how to calculate them so you get the highest return possible. Most new investors skip over most of these, and it costs them—big time. But calculating these in advance lets you know whether you’re buying at the right price, how much you can later sell your property for, if your rents will be high enough for you to cash flow, and whether the deal is even worth holding on to. Plus, we’ll throw in a bonus metric you can easily calculate that quickly shows you whether a rental property, fix-and-flip, BRRRR (buy, rehab, rent, refinance, repeat), or any other deal is actually worth the effort you’re going to put in. In short, if you know these six numbers, you can confidently make a move on that first or next investment property. In This Episode We Cover Do NOT trust the list price! How to tell if the property you’re buying is overpriced, underpriced, or just right The one thing every real estate deal must have for Henry to buy it (it’s not cash flow) How to price rent (the right way) and ensure you’re going to cash flow The single most overlooked expense that can ruin almost any real estate deal Stop trusting "cash flow." This metric works much better at calculating returns And So Much More! Check out more resources from this show on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠BiggerPockets.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.biggerpockets.com/blog/real-estate-1244 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠[email protected]⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Dave Meyer?

  These are the six numbers you need to know before buying a rental property. Too many investors are still buying properties based on vibes in 2026. They say stuff like, "It feels like a good deal," or "It'll cash flow if mortgage rates come down." That is not investing. That's speculation. Today, we're going to walk you through the six numbers you absolutely need to know before you buy any rental property, whether it's your first deal or your 15th. These are the numbers we personally look at when analyzing properties so we can make sure we're picking the properties that bring us closer to financial freedom and avoid the costly mistakes that slow you down. By the end of this episode, you'll know which metrics to prioritize when running your numbers,

• 0:45Dave Meyer?

  exactly how to calculate each one, and how all six fit together to tell you whether a deal is actually worth buying.

• 0:59Dave Meyer?

  What's up, everyone? I'm Dave Meyer, Chief Investment Officer at BiggerPockets, here with my co-host, Henry Washington. Henry, how's it going, man?

• 1:07Henry Washington?

  It's going well, bud. How are you?

• 1:09Dave Meyer?

  Good. I'm excited to talk about numbers, as I'm guessing you can tell. You know this about me, that this is what gets me going in the morning, is talking about numbers. Well, you all probably know that as well. I love numbers. And between the two of us, between Henry and I, we have analyzed probably thousands of real estate deals. And I can tell you that the difference between investors who build wealth and investors who stall out usually comes down to understanding their numbers. You know, Henry, we talk about this all the time. Like, a good deal is just kind of a simple math problem at the end of the day.

• 1:41Henry Washington?

  Yeah, if you're buying a deal on today's merits, then yeah, it's a math problem. I think a lot of the times, people get into like, what's the value of this going to be in the future? That's speculation. We're talking about what's it worth now?

• 1:52Dave Meyer?

  And the assumptions that you make about each of these six numbers are really what's important. So, Henry, start us off. What's number one?

• 1:59Henry Washington?

  Well, number one is current value, sometimes referred to as "as-is" value. So what's the current value of the property?

• 2:07Dave Meyer?

  Oh, you mean list price?

• 2:09Henry Washington?

  Absolutely not list price. List price has nothing to do with what the value of the property actually is. Now, a good Realtor should help you price your property appropriately for what the market is willing to pay for your property in its as-is condition. But that's not what always happens. What a property is listed for is just what someone thinks and/or wants the property to sell for. It does not mean that that is the current value of the property.

• 2:40Dave Meyer?

  Why is this important?

• 2:42Henry Washington?

  Well, it's important for a couple of reasons. First and foremost is you don't want to overpay for a property. And, and as a real estate investor, our job is to invest. And the golden rule of investing is to buy low and sell high. And so if you buy at the high point, it's going to make it very hard for you to sell at a higher point. So you need to buy at current value so that you can add value to it and sell at what's called the after repair value, which hint, hint, we'll talk about later.

• 3:11Dave Meyer?

  That's exactly right. I, I think this is a, a super important concept that honestly, people were overlooking for a lot of years because property values were going up so much, it didn't even really matter. You're like, oh, if I overpay by 2%, like who cares? It's going to be worth 10% more next year. But right now, in this kind of market, I think knowing the current value is probably the single best way to protect yourself against further declines, right? Cause if you know property is worth 200 grand, you're getting it for 190, you have a cushion there. Not only are you buying a good deal, you're buying it under current value, right? That's a good way to protect yourself in this kind of market. But it's hard to tell, right? So like, if you can't rely on list price, because you can't, that's obviously someone's advertising for a property.

• 3:54Dave Meyer?

  As investors, we need to figure out our own value. How do you calculate it?

• 3:58Henry Washington?

  I think an accurate way to get current value is an actual appraisal. Cause an appraiser is going to come in and they're going to value that property based on square footage and comps and finishes, finished quality. So an appraiser is one way. So you can pay for an appraisal. That's going to cost you some money, but could give you a good idea of current value. Or you can have a real estate agent comp it for you. You just need to make sure that your real estate agent knows we have to comp like finishes. If your house or the house you're trying to get a current value on is not in great shape, you've got to pull other comps in not as great shape and see what they sold for.

• 4:40Henry Washington?

  So you can have some idea of what your current value might be.

• 4:44Dave Meyer?

  You know, I was in the intro of the show, I was joking that people make decisions about properties on vibes, but like there is a vibes element of current value. Like, I don't know how to explain it. This is why his estimate doesn't work that well, right? It's why like all these iBuyer programs failed is because like Henry said, the Zillow picture can't tell you the quality of the finish or the soft close on the cabinets or oftentimes layouts, you know, the height, the height of a basement ceiling and whether that's usable quality square footage or not. Like there is a vibes element to it. And I do think, you know, we make fun of his estimates, but I do think algorithmic stuff is helpful. I think it's directionally often accurate, but you got to get in there or you need an agent

• 5:29Dave Meyer?

  in there to actually tell you what the vibes are so that you can learn all the information Henry was saying.

• 5:36Henry Washington?

  So yes, understanding current value is massively important. Having some sort of licensed professional, whether that is a real estate agent or whether it is an appraiser can help you find an accurate number. But it is essential, you do not want to pay more than current value for a property if you want to protect yourself in any real estate market. And that brings us to our second must know, must understand term, and that is equity. What the heck is equity?

• 6:05Dave Meyer?

  Oh, boy. Okay. I'll spare you the, the accounting definition of equity is, but basically.

• 6:12Henry Washington?

  Why do I think you know the actual like textbook definition?

• 6:15Dave Meyer?

  Of course, it's in my book. I literally wrote the textbook that has.

• 6:21Dave Meyer?

  Well, I'll actually explain it because it's actually just two numbers. It's basically the value of your assets minus your liabilities. So that in a, in a real estate transaction, what's your health worth? That's your asset, right? So let's just say it's worth $400,000. Your liabilities are how much money you owe other people. So most of us take out loans when we buy properties. And so our biggest liability is our mortgage. So if you had a mortgage of 300,000, you would have equity of 100,000. That's the simple definition of it. Of course, with more complicated deals, you may have some additional assets. You may have some additional liabilities, but that's basically it. What's the value of the thing you own minus the value of all the things you owe other people? That's your equity.

• 7:06Henry Washington?

  This is the one real estate metric that I must have on every real estate deal.

• 7:14Dave Meyer?

  This is the juice.

• 7:14Henry Washington?

  This is the juice. I have bought deals that don't cash flow on day one.

• 7:19Dave Meyer?

  Yep.

• 7:19Henry Washington?

  I have bought deals that have some sort of not great value in other metrics, but I have never, ever, ever bought a deal that I didn't walk into equity on day one. This is the most important real estate financial metric, in my opinion.

• 7:36Dave Meyer?

  Equity is the nest egg. Like this is how you really build wealth in real estate, right? By buying a leveraged asset and having it appreciate over time, you build equity. And in every deal I do, I'm sure Henry is the same way. Like you need to have a plan for how you're going to grow that equity. Because on day one, you go in and you buy something at current value, which is a totally fine way to do it. Your equity is just the money that you put into that deal. And so you need to think about ways that you're going to drive equity without putting more money into your deal. And so, Henry, I think you mentioned earlier, walking into equity, which is a term that investors use. Maybe you can explain that to us because that's one of,

• 8:18Dave Meyer?

  or if not the best way to drive equity growth in your portfolio.

• 8:22Henry Washington?

  Yes, and you're exactly right. And so what I mean by walking into equity is any equity in the property that I didn't have to pay for that I get on day one. In other words, if I'm going to buy a house and I put $50,000 down and I paid market value. That's $50,000 of equity. I did not walk into equity. I walked into zero equity and then I paid for $50,000 of equity. But if I buy that house for $50,000 below market value, then I walk into $50,000 of equity on day one. And then any money I put down to buy that property

• 9:01Henry Washington?

  is additional on top of that equity. So if I pay $50,000 on top of the $50,000 discount I got, I now have $100,000 of equity, but I walked into $50,000 of it.

• 9:13Dave Meyer?

  And that's just Henry hustling and finding great deals. So that's like a great way to build equity in your portfolio. The other way to do it is to renovate, right? Some people call this forced depreciation. We call it value add oftentimes, but this is buying a property under its highest and best use and renovating it and driving up the value of that property by more than what it costs you to actually drive up that value, right? So you buy something for 200, you put in 50, hopefully it's worth 350, right? That's 100 grand in equity that you just built. And so that is a key strategy that most, all real estate investors use at some time during their portfolio.

• 9:57Dave Meyer?

  So enabled to do that well, though, there's another number that you need to know, which we're going to cover right after this quick break.

• 10:05Henry Washington?

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• 10:42Dave Meyer?

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• 11:16Henry Washington?

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• 11:58Henry Washington?

  And because you're the sole manager, there's no hourly minimum to meet. That lets you use a cost segregation study to accelerate the depreciation and potentially write off over $100,000 against your income. Even on your first rental, add in cash back up to 13% of the home price, which exceeds $60,000 on some properties. With this massive cash back incentive, investors are seeing total returns up to 126%. New construction, A-class properties, and inventory is limited. Learn more at biggerpockets.com/retirement or text REI to 33777. Again, text REI to 33777.

• 12:40Henry Washington?

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• 13:19Henry Washington?

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• 13:43Speaker 02

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• 14:12Dave Meyer?

  Welcome back to the BiggerPockets Podcast. Henry and I are here breaking down the six numbers every real estate investor needs to know for every deal they do, whether it's your first or your 10th. We've talked about current value. We've talked about equity. Next, let's talk about after-repair value. Because this is the other way, other than walking into equity, that you can drive up that equity in any deal you do. Henry, what is after-repair value, or ARV?

• 14:38Henry Washington?

  Equity is the number that I want on my balance sheet. ARV is the number I need to know to make sure I don't screw that up. Okay, what is the property going to be worth after the repairs? Or after the renovation? Or after the value add? It is the key because it's going to drive profitability for you. And it's going to drive your offer prices. As real estate investors, we make our offers based on what we think the after repair value is going to be, especially for a flipper. Because a flipper wants to know, what can I sell this house for? That's your after repair value.

• 15:20Henry Washington?

  And if you assume a property's ARV is higher than it actually turns out to be, you can go from profitable to in the hole.

• 15:30Dave Meyer?

  Yeah.

• 15:31Henry Washington?

  Very fast.

• 15:32Dave Meyer?

  Real fast.

• 15:32Henry Washington?

  Real fast. Our protection in real estate investing is the cushion. The way that you get cushion is understanding what's the property going to be worth after you fix it or add value? And what's the property currently worth? When you have those two numbers, you can make a more educated offer where you give yourself enough cushion not to lose your shirt.

• 15:55Dave Meyer?

  If you're doing the BRRRR too, it's equally important, right? You need to make sure that you are offering the right amount, that you have the right budget for your renovation, so that you're not spending more than you're increasing the value of your property, right? This is essential. And the calculating, it's kind of the same that you said for number one, right? For as is value, you're basically just comping this out based on similar properties. Like you have to find the most comparable properties that you can. And Henry already gave some estimates for that. But do you have any other advice on how to calculate ARV well?

• 16:25Henry Washington?

  The difference between ARV and current value.

• 16:29Henry Washington?

  Is with ARV, we're trying to predict the price in the future. And with current value, we need to know what the price is right now. And so it's easier, in my opinion, to assess current value because no one knows what the market's going to look like in six months. Should it look very similar to what it looks like now? Yeah, probably. But there's seasonality variation. Every market's a little different. You know, if there's some sort of black swan or crazy event, it could drastically affect what that property value is actually going to end up being. Once that future value time point comes and you're ready to sell and/or refinance that property. So it is more of an art form. You do have to use factual current data, but none of it is 100% foolproof because again,

• 17:13Henry Washington?

  it is a future value we're trying to predict.

• 17:16Dave Meyer?

  Yep. And that's why I always recommend being conservative. You know, you shouldn't pick the highest comp that you see and assume that you're going to get it. If you do, fantastic. But you do not want to rely on getting the best possible comp. You might have a weird week. There might be a bad month. There might be, who knows what's going to happen the day you list that property. Don't assume you're going to get the best. You're better off being, I think, conservative with all these numbers. But yeah, it just, that's a general advice. It's just being conservative with all of it.

• 17:44Henry Washington?

  Yep. Most real estate agents, if you ask them to comp a property for you, are going to give you a number that comes from a range. So they may tell you, hey, I think ARV is 200,000. But they're pulling that from a range because they pulled multiple comps and they have an idea of what's on the low end of that range and what's on the high end of that range. So when you're talking to agents, make sure you tell them, I would like conservative ARVs. If I ask you for a comp, give me the middle to the low end ARV, not the tippity top, and that will help protect you.

• 18:16Dave Meyer?

  Great advice.

• 18:17Henry Washington?

  All right. This is an important metric for flippers. But as Dave said, it's also an important metric for rental property owners because essentially every deal turns out to be some sort of a flip because you're probably going to refinance at some point or you may sell that asset at some point. So this value is important. But there is another value that is far more important to rental property owners, and that is rent comps.

• 18:45Dave Meyer?

  I love rent comps. This is my, I think this might be my most important metric in today's day and age. It's basically the ARV for rent.

• 18:53Henry Washington?

  Yes.

• 18:53Dave Meyer?

  You know, if I'm going to do a BRRRR project where I intend to hold on to this property, for me right now, the ARV, the value of the property is important because it's my guidelines to make sure I'm not overspending, that you're finding the right deal. But for immediate performance of the deal, the rent comps matter more. I want to know, yeah, maybe I can rent out this unit for 1,200 bucks. I put 30 grand into this property. Am I going to be able to rent it for 1,300 bucks or 1,800 bucks? Because that's a pretty big difference. And to me, that's super important because I, you know, I think I've explained on this show, my sort of formula for deals right now, doesn't need a cash flow day one, but after stabilization, you know, after I do a renovation to it, it's got to be seven, eight, hopefully, percent

• 19:38Dave Meyer?

  cash on cash return, maybe even higher than that. And so, yes, your repair budget is important to that, but knowing what I can realistically rent things out for is probably the most important number I spend the most time thinking about, I'd say, underwriting a deal right now.

• 19:54Henry Washington?

  I think you said a word in there that was kind of important. You said realistically rent things out for? What, what, what do you mean by that?

• 20:01Dave Meyer?

  Uh, it means that I take whatever an agent or a property manager tells me and then I discount it by like 20%.

• 20:08Henry Washington?

  That's, that's, we're joking, but we're serious.

• 20:11Dave Meyer?

  I'm actually serious. That's what I do.

• 20:13Henry Washington?

  So you 100% should do that.

• 20:15Dave Meyer?

  I, it's not even that I think they're lying. I just like to be conservative about it. This is how I underwrite deals. Like if you tell me you're going to rent it for 1,600, I'm going to be like, well, if there's a bad month, I want to be able to make, lend it for 1,400 and still be able to make money. Uh, and so I usually, with rent comps, especially in this kind of market, I take the low end of the comps. To me, the, the most important thing is that I'm going to be able to lease it actually. So I look a lot at like vacancy data too, in my rent comping and sort of adjust for that. Like if, if I could rent it for 1,600 bucks, but it's going to take me two months, I don't care. I, I'm not doing that. If I can rent it immediately for 1,400, I'm using the number 1,400.

• 20:56Henry Washington?

  This is a place where a lot of new real estate investors lose profitability because

• 21:03Henry Washington?

  We get excited. We find a deal. We're like, oh, it's going to rent for 1,800 bucks. It's awesome. I'm getting it for this price. I'm going to fix it up. It's going to be great. Then you stick it on the market and your property manager comes to you and says, hey, we're not getting any bites at 18, but I got a solid candidate at 1,650. Great credit score. Great job. Great history. Can you get to 1,650? Like, to me, that's music to my ears. Great candidate with a little bit of a discount. I'm taking that all day. But if you underwrote it at top rents and now you're losing money renting to a great candidate at a little bit of a discount, that's not a position you want to find yourself in.

• 21:39Dave Meyer?

  All right. So that is rent comps. We got to take a quick break, but after that, we're getting to the numbers that really matter to most investors, which is how much cash you're bringing home each and every month. Stick with us. We'll be right back. For my wife's birthday, I wanted to make her a new website for her landscape design business. So I researched a lot of different options. I tried out a couple, but honestly, it was really overwhelming. It was pretty time consuming and still the site wasn't coming out the way I wanted it to. Then I tried Hostinger and everything was super simple. I asked Hostinger's AI to build a clean site for her business and it had a working version up in minutes. No coding or designer needed. Plus, its AI agent helps

• 22:23Dave Meyer?

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• 22:53Henry Washington?

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• 23:37Henry Washington?

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• 23:53Dave Meyer?

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• 26:29Dave Meyer?

  Welcome back to the BiggerPockets Podcast. Me and Henry are going through the six numbers you have to know. You shouldn't be buying deals until you know these six numbers. Just as a reminder, we've talked about current value, or as-is value, equity, after-repair value. We've talked about rent comps. Henry, what's number five?

• 26:47Henry Washington?

  This is the one that gets people, both in flipping and in rental properties. This cooks people.

• 26:53Dave Meyer?

  I don't understand. How do people miss this? But please, let's make sure no one else misses it ever again.

• 26:59Henry Washington?

  We are talking about holding costs, guys. This is what it costs you.

• 27:04Dave Meyer?

  To run a business.

• 27:06Henry Washington?

  To run a business. And it can smack you upside the head, both with flipping and with rental properties. But they're a little different with the two different strategies. So let's talk about flipping first. Holding costs as a flipper is your debt service. Most flippers are borrowing money to buy properties and renovate them.

• 27:27Henry Washington?

  And a lot of flippers used high interest products like hard money or expensive private money. So we're talking nine to 15% interest rates on some of this money. And a lot of these products are interest only. And so you have a hefty mortgage payment on a property that doesn't produce any income because you're renovating it. No one's living there. And so these mortgage payments, it baffles me sometimes when I look at flippers' numbers and they aren't paying attention to how much money they're going to spend over a six to eight month period in paying the debt service on this property. That's crazy. It will eat your profits alive.

• 28:09Henry Washington?

  And the other mistake they make is they don't budget the holding costs for long enough. They say, oh, I'm gonna buy it, I'll renovate it in 60 days, it'll take 30 days to sell. I've got four months of holding costs budgeted. And then it takes you eight to 10 months to get that property done and sold. And now your holding costs doubled. And if you're paying something like between two and five grand a month, your profitability can go out of the window in a heartbeat if you go over like that. So you must prepare for holding costs and you must budget for at least two to three months longer than you think you need the money for. And that's a semi experienced investor. If you have never done a flip, you need to double your timeframe.

• 28:54Henry Washington?

  Easy, out of the gate, double your timeframe on your holding costs. But the holding cost most flippers forget about isn't the debt service. They know they got a mortgage to pay. The holding cost they forget about is utilities. You gotta have the power on, you gotta have the water on, you gotta have the gas on toward the end. Like some of these things, they creep up on you. It can be anywhere between 500 bucks a month to a grand or $1,500 a month that you weren't planning on spending that now you realize, oh yeah, I've got, I've got that holding cost. Now, where holding costs truly bites people in the butt is the landlords. Because a lot of people still tend to think they make money because their rents are higher than their mortgage payment. It drives me insane. And that's not true.

• 29:37Henry Washington?

  There are so many more expenses or holding costs that you have to consider when you're a landlord. That you need to be underwriting into your deal because you do have maintenance that's going to happen.

• 29:50Dave Meyer?

  Yeah.

• 29:50Henry Washington?

  You're gonna get a phone call. It's gonna be annoying. I literally got one as we started this podcast. I have to replace part of my HVAC unit and they were like, here's a bid for eight grand.

• 30:01Dave Meyer?

  Yeah.

• 30:02Henry Washington?

  Right. To me, that's a capital expense and that should be part of your holding costs. Not only do you have maintenance, which is a normal wear and tear stuff, breaks, you gotta fix it. But you have capital expenses like your HVAC and your roof, these things that don't last forever and they're expensive. You need to be budgeting some money every single month out of the rent, setting it aside. So that when these things come up, you've got some cash to be able to take care of those things. But I think the two that really bite people in the butt in holding costs are vacancy and property management. And I say property management for those people who want to self manage. For people who are planning to operate with a property manager from day one, they typically.

• 30:43Dave Meyer?

  Yeah, usually underwriting.

• 30:44Henry Washington?

  But a lot of us investors just getting started are like, I'm just gonna manage it myself. And you don't add it into your underwriting. And then as you grow, or you just get tired of managing properties, you need to outsource it and you lose your cash flow. Cause now you gotta pay somebody 10% to manage it.

• 30:59Dave Meyer?

  Yeah, I definitely didn't budget for it when I started.

• 31:02Henry Washington?

  But vacancy to me is the killer because most people, if they do think about it, they don't budget enough vacancy.

• 31:09Dave Meyer?

  What do you put in for vacancy at most places?

• 31:12Henry Washington?

  Again, you need to understand what's the average vacancy in your particular market. Every market is different. And so you need to ask property managers what they think the vacancy rate is in your market to understand. In my market, it's about 5%. But I'm never just gonna budget 5% for vacancy. I'm typically gonna double that because I want to be able to cover at least one to two months rent. If somebody moves out and there's a longer turnover.

• 31:37Dave Meyer?

  Yeah, for a single family, I do eight because that's one month, basically 8%. But for multifamily, I usually do less because you know, if you have a four unit, you're not gonna have three of them turnover in one year, most of the time. But that is one thing also I want to add is turnover costs.

• 31:52Henry Washington?

  Yeah.

• 31:53Dave Meyer?

  Some people loop that in with repairs too, but a lot of times. It's just normal wear and tear. When someone moves out, you had a tenant there for five years. You know, you're gonna have to put new carpet in. You're gonna have to throw in a coat of paint. You're gonna have to fix some holes that they somehow ripped out of the wall. You know, you're just gonna have to do stuff like that and it's better to just budget that in right there. But like, this is the thing that like separates people who succeed in rental property investing and don't. Because I see on Instagram every damn day, someone's like, oh, I thought I had all this cash flow until I had a turnover and then I had to pay two grand and all my cash flow is gone. That wasn't cash flow in the beginning. Like if it wasn't budgeted in, it wasn't cash flow.

• 32:35Dave Meyer?

  That was revenue that you had, that you was coming into your business, but it wasn't cash flow. Cash flow is profit and you don't calculate profit without your expenses. That's not how it works.

• 32:46Henry Washington?

  Absolutely. Gross revenue, not cash flow. And you gotta remember too, guys, you should have a framework for what you set aside for these expenses, but it can and should shift based on the property. If I'm buying a hundred year old house, I'm gonna budget more maintenance and more CapEx than I would if I'm buying a brand new asset. You have to adjust the underwriting.

• 33:08Dave Meyer?

  And especially if you're renovating, you can actually bring down your maintenance and CapEx expenses because you're gonna do it upfront.

• 33:15Henry Washington?

  So if you do this properly, if you budget your holding costs appropriately, then when you do have a surplus of income coming in, you truly do have positive numero six is cash flow. Dave, tell them about cash flow.

• 33:35Dave Meyer?

  Cash flow is actually quite easy and we're gonna actually, I'm gonna give you a bonus one. We're gonna talk about two numbers, cash flow and cash on cash return. We just basically gave you the definition of cash flow before. Basically, your gross revenue, all the rents, pet rent, coin op, laundry machine in your rental units, all that stuff, minus all of your expenses and we're gonna count all of your expenses. It's not just taxes and insurance and mortgage, talking vacancy, holding costs, CapEx, repairs, property management. All that stuff needs to go in and what you're left over with, that's actually your cash flow. That's the profit that your business is generating. Now, it's super important that you calculate this right, but I actually think cash flow itself,

• 34:19Dave Meyer?

  like the absolute number is not that important. Like people, you know, like

• 34:24Henry Washington?

  Cooked in the comments, Dave.

• 34:26Dave Meyer?

  But, okay, I, I think cash flow itself is important, but what, what I don't like is people like, I want $200 a month per unit. What does that mean? Did you invest $10 million to make 200 bucks a month? That's a terrible deal. Did you invest 10 grand to make $200 a month? That's a great deal. See, that's why I think cash on cash return, return on equity, those are the metrics that really matter because it measures efficiency. And that is what I care about as an investor is how efficiently is my capital and my time making me money? Because if I'm investing a ton of time and a ton of effort to make a 2% cash on cash return, I'll just put it in a savings account. I can earn 4% right now, right?

• 35:10Dave Meyer?

  So you need to understand the rate of return, that measure of efficiency. And that's where cash on cash return comes in. And so the way you do that is you take your cash flow that we just talked about, your annual cash flow, and divide it by the total amount of money that you've invested into that deal. So if you're making eight grand a year in cash flow and you invested $100,000 into that deal, that's an 8% cash on cash return, which I think is a good cash on cash return. That's a deal I would probably do. So that's what I would recommend really focusing on. You need to know cash flow so that you can calculate cash on cash return.

• 35:45Henry Washington?

  Cash flow is a measure of success. I want to buy a deal that cash flows because really that tells me is that I bought a decent deal. What it doesn't tell me is how profitable that deal really is. So cash flow, I think it's just kind of grown this almost personality where it's like, cash flow is what you need to retire and quit your job, but that's not what truly builds wealth. Equity is far more important for those things, but cash flow is more a measuring stick. Are you buying a deal? That at the end of the day, the property is paying for itself. That doesn't tell you if it's a great investment as a property. It just tells you this deal pays for itself.

• 36:28Dave Meyer?

  Right, it doesn't. If I told you, Henry, you know, I have a fourplex that I spent a million dollars on and it earned me $500 a month in cash flow, you'd probably say that's a pretty bad deal, right? Like, that's not a good use of my money. And I think people need to sort of just like back this out a little bit because if you just think, if you have a goal to, let's say, get $10,000 a month in cash flow, like that's your ultimate goal 10, 20 years from now. If you're earning an 8% cash on cash return, you're going to need $1.25 million in equity to do that. If you're earning only a 4% cash on cash return, then you're going to need $2.5 million in equity, meaning you're going to have to earn twice as hard.

• 37:10Dave Meyer?

  And so I just don't, I think it's sort of trivial to say, okay, I'm making 400 versus $500 per month. My goal is always to keep that rate of return as high as possible because that means I have to do less. I could buy less properties. I have to work less, right? Like, that just means I have a better quality of life because my deals are more efficient.

• 37:30Henry Washington?

  Yes.

• 37:31Dave Meyer?

  Well, all right, there we have it. That's six, six and a half. We gave you six and a half. We lied. Six and a half numbers that you need to know. There are obviously other things that you can calculate. I literally wrote a whole book with all sorts of other numbers that you, that matter to you. But if you're new, or maybe you just don't like over analyzing things like I do, these six numbers can absolutely tell you whether or not you're having a good deal. Everything else on top of that is kind of gravy, in my opinion. These six numbers are what you need to know about every deal. And if you don't feel confident about these numbers, don't buy that deal. Like, you have to feel like you know these numbers inside and out, and you feel like your assumptions about these numbers are right before you pull the trigger on anything.

• 38:14Henry Washington?

  I think we covered a lot of ground, but I really want people to understand the importance of studying these numbers because the more you're comfortable with these numbers, the more you're going to be comfortable with making offers and actually getting real estate deals that make sense. When people are uncomfortable in a deal, it's probably because they didn't have a great grasp of one of these concepts.

• 38:36Dave Meyer?

  Well, thank you all so much for joining us. Two resources for you guys if you want them. If you want to learn more numbers, I literally wrote a book called Real Estate by the Numbers. You can check it out. Or, once you have a firm grasp on these numbers and you want to go run deals, the BiggerPockets Calculator, if you have a Pro membership, you can put all six of these numbers into those calculators. It'll do all the math correctly for you and you can tell whether or not you have a good deal. That's all we got for you today on the BiggerPockets Podcast. Thanks, Henry. Thank you all for listening. We'll see you next time.

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