Hey, guys. Do you truly know what your profit potential looks like on any given deal that you do? I know that in the beginning I struggled with this, and as the years have gone by, I have been able to figure this out. And so what I've done is I've created a calculator calculator that calculates profitability on subject to deals specifically. And this week I had a request from a member of our Facebook community to go through a deal that I have done and plug all of those numbers into my calculator and see what that really looks like.
And so that's what I've decided to do here. This calculator is going to give you exactly the numbers that you need to know to determine whether or not the deal that you're looking at is going to be a good deal for you. So without further ado, let's jump into the video.
All right, welcome back. Before we get started, go ahead and click the subscribe button on the channel and then go over and click the notification bell so you can get notified of any new videos that I put out here on the let's talk subject to channel. So let's go ahead and jump into the calculator. I'm going to switch my screen.
Okay, so here we are inside the calculator, and I've renamed this calculator the deal Evaluation Calculator versus the Profitability Calculator. Because this thing really does what it does is it takes place of a financial calculator, and this is subject to specifics. So bear that in mind. This is not going to be one of your cash offer types of calculators. This is specific to subjectto deals.
And so what we have here is a property address, which I'm not going to fill out just for reasons of anonymity. Then we have the green fields. All of the green fields are editable. The gray fields are where calculations happen. It auto populates, so you can't fill those out.
And then what we have here at the bottom, we have four different exit strategies, which is owner finance, lease option rental, or flip. Your exit strategy may be just one of these exits. And that's okay. That's perfectly fine. So on this first tab here, the acquisition assumptions, you're going to need to know every single one.
If it's a green field here, you're going to have to know every single one of these fields. You're going to have to or you're going to have to make the very best guess that you can if you don't know the specific number. I happen to know the numbers on this deal that I'm going to show you because it was a significant deal for me. It was one of my very first deals that I've ever done. So these first couple of fields you have after repaired value and fair market value.
A lot of people don't know the difference between after repaired and fair market value because we're all taught to just use after repaired value and ARV or after repair value is nothing more. It is exactly what it sounds like. If this house is HGTV ready, meaning it's shiny, sparkly, retail ready, what is its value at that point? And for this house? Back when I bought this house, it was worth $135,000.
Now, fair market value is a different figure. Fair market value is what is the house actually worth today? What will it sell for on the retail market today without making any repairs to it or fixing it up or anything like that? And luckily for me, on this property, at the time, the house needed very little, so it was worth about $128,000. Needed very little work.
Now, the seller's loan balance, the remaining balance on her loan was $94,000. And I did not have any expenses on this property, meaning I wasn't giving any cash to the seller. I wasn't paying an agent to bring me this deal. I did have some very minute closing costs, but I actually closed this deal myself. So I'm not even going to include them here.
I don't include $30. I think that's what I paid to close this property repairs on this house, it really only needed flooring and clean up. Then I had it mowed. I had the grass mode a couple of times, and I think I spent a total of around $1,200. Not much to it.
When I met the seller, she was eight months in arrears. So she was eight months behind on her payments. I don't get freaked out because this shows an error right here. This will actually fill in once we get some of this information filled in. But if you know the actual reinstatement amount, this calculator will use, that over the approximate amount.
So if you know this, go ahead and plug that in. I don't know what the exact amount was, but I do know she was eight months in arrears. And I do know what the rest of these figures were. Her original underlying loan amount and what that is, that is the loan that she was approved for and that she used to purchase the house. We need to know that amount so we can figure out what principal and interest payments are.
Of course, taxes and insurance and all that stuff comes a little bit later down here. But for right now, we need to understand what her original underlying loan amount was. And she got approved for the loan at $129,000.
That's how much her original loan was written for. Her underlying interest rate was $3.75. The term of her loan was 360 months. And the number of months that she had paid on that loan by the time I met her was she was nine years into this mortgage. So it was 108 months.
So she had 252 months left on this note. Now, the underlying loan I see I made a mistake here. I said underlying loan, monthly principal and interest negative $40,000. But I went back up here and I noticed I put a 375% interest rate. It was $3.75.
There we go. That's more like it. So that was our monthly this calculation is our monthly loan principal and interest only. It doesn't include taxes or insurance. We're going to plug those in right here.
Her yearly taxes were I'm sorry, they were $1200. Her yearly insurance was $1,400. There was no HOA there, so I didn't have to worry about that. So now that this is completed, we can see what the loan reinstatement was and there's approximately that amount. And this is the amount that I paid to the actual trustee, the foreclosure trustee who was foreclosing on the property.
So that is the actual amount that I wrote out, or very close to it because there's a couple of dollars here and there that I didn't throw in. But I can tell you for sure that I paid right around $8,000 to reinstate this loan. So now that we have this information filled in, we can see that our front end purchase expenses $8,787, which includes arrearges here the 7557 plus the 1200, plus the $300. So this is our total upfront expenses. Now, on every deal I do, if I'm going to buy and hold it, I need reserves.
I need a minimum of three months reserves. So what we do is we take our monthly piti, which is principal interest, taxes and insurance. We multiply that by three. That's my reserve requirement. So my total front end cash requirement, everything that I need upfront is $11,246.
That doesn't come into play until we get into these tabs, which let's go ahead and jump into the Owner Finance exit tab. Now with Owner Finance, what I'm going to be doing here is I am going to actually, once I buy this property, subject to I'm going to sell that property on a contract for deed to an end buyer, to somebody, an owner occupant, who is going to live in the property. Now in Texas, this is going to be called something else. You guys do mortgage reps down there and all inclusive trustees. That's not what we do here in Missouri for the most part where we have the ability to do it.
But in Texas, they've made things so difficult that you pretty much have to do a mortgage rep down there. So all I'm trying to tell you is that the Owner Finance Exit is nothing but taking the property that you own, wrapping it up and then reselling it to an owner occupant with either a contract for deed or a mortgage rep or some other form of owner financing instrument. And so what we have here is everything carries over. So you'll see up in this box, this acquisitions section here, everything just carries over from here into here. Now all we have to do is go in and plug in our numbers that we are going to use when we sell this property to our owner Occupant buyer.
And so with owner finance, this gets really fun. And this is my preferred exit strategy. I literally get to create these numbers and base these numbers off the amount of cash flow that I would like to receive. So, for example, if I know that the fair market value of this home, the way that it sits is $128,000, I can take and I can bump this price up because I'm offering owner financing. So let's say we bump it up 10%.
Well, I know that I can sell this house now for $140,000. So that's what I would advertise it at. I'm also going to require a down payment. And you can work these numbers any way you choose. I start at 10% on this.
So I know that if I start at 10%, it's 10% of my sales price. So I'm going to be receiving an upfront payment from the new buyer of $14,080 owner finance term. How long am I going to own or finance this property to that buyer? And this is in years. I'm going to choose a 30 year term.
This is where the owner finance interest rate. This is where I'm going to create the spread between what my monthly payment is right here on the underlying note and what the new buyer is actually going to be paying me per month, I can take this interest rate. So if I know that my interest rate on the underlying note is 3.75%, let's say I make this, I don't know, 9.75. Let's do a 6% bump in interest rate and let's see what that gives us. So my day one equity spread, if I'm going to own or finance this to an owner occupant is negative $2,280.
I normally wouldn't want a negative equity spread here. And what's going to happen is the more that I increase my down payment size, it's going to make that spread even larger because they're actually paying down the principal to me. So what I'll do here instead is I'll go in here and I'll bump my owner finance sales price to say, 11%. That drops it down even further. And I may even drop this down payment amount to say 9%.
And so now I don't have much of an equity spread, but I don't really care too much about the equity in this deal. I'm more concerned with the cash flow at this point. So what we can see here is the owner finance monthly principal payment. This is the principal and interest that my buyers are going to be paying, just principal and interest only. So we can already see that I have a spread between what they're paying and what I'm paying on the underlying note.
So after taxes and insurance are calculated for the owner finance buyer that I'm selling to, this is what their monthly payment will be, $267. And you can see that we've got a decent little spread here. 1260 $7. My payment on the underlying note is 820. So we're a little over $400 a month in cash flow there.
And by the way, when you sell on owner financing, your buyer is actually responsible for their own taxes and their insurance. You are not. So this is actually going to go down the projected piti on this because they are going to pick up the insurance and taxes and insurance portion of that. So, again, my front end purchase expenses are 75, $87. My reserve requirement, my front end profit.
Now this is just cash in my pocket. This is after the reserve requirement is met and I have been paid back for the arrears. I'm just going to walk away with $3,000. Not a huge amount, but it's better than being in the negative. So I'm going to get paid back everything that I've put in and I'm going to make three grand.
Now, this is the big one. My monthly cash flow right now on this deal is $448 per month. Not a bad deal. And I'm going to immediately right here, number of months before cash flow or zero, that's a big one. So my break even is met.
As soon as I buy this deal, my cash on cash return, it really is infinite. But I have put some cash into this and so it's going to calculate the cash that I put in, which is the front end expenses that I had and funding my reserve requirement. And then once I'm paid back with this down payment, twelve, 787, I'm going to be paid back that full amount and I'm walking away with $2,742. Equals a cash on cash return of 195%. Not a bad deal.
This information down here, most people don't calculate a cap rate on single family houses, but I do because these two figures together, these two percentages together are going to tell me whether or not this is an actual deal for me. And the cap rate is nothing but the net operating expenses on a yearly basis divided by the actual price that you pay for the property. And then your loan constant is a measure of risk and that number is based upon the principal and interest times twelve divided by the loan amount. And what this does is this actually creates the spread for you. This is where this monthly spread and the front end profit spread, this is where they're derived from.
And generally you're looking for in real estate, at least a 1% spread. Here you can see that we've got almost 5% somewhere. We're just shy of 5%. So this means it's an excellent deal. And if you want to know more about this, I highly, highly recommend that you look at the George Antones.
That's A-N-T-O-N-E George Antonesfinak Academy. It's brilliant information. I will use it on every single deal that I do from this point out on. And I'm telling you, the guy is a genius. So I'm not going to get too into this because I cannot explain it as well as he does.
Just know that if you're using this calculator and this field turns green, it says yes, then you have a potential deal on your hands. Let's go in and look at the lease option. Now, the lease option, again, all of this information carries over. It gets a lot less complex here than the owner finance option. As you go down from owner finance to lease option to rental to flip, this goes from the most advanced down to the least.
And so we're in the lease option tab. And let's look at our monthly lease amount. So if we know that maybe the area supports the month rental rate, if we have a security deposit on our lease, we'd enter that here. Since I'm doing a lease option here, I don't generally charge one. So I'll put zero our lease term in months.
I generally do 24 months. You can pick whatever you choose. If you're going to pay utilities, you're going to plug that in here. I do not pay utilities. This is where you're going to plug in your options sales price.
So let's just say that we've got a fair market value of $128,000. Let's bump this. Let's just say that we want to sell this for $135.
So if that is the price, your option price is the price that your buyer or your tenant rather is going to be buying that property for at a later date. Normally when you put down an option deposit, that applies to the purchase price of the house. So what you're going to do here is if you charge a percentage so for example, let's say that the option price is $135,000 and you want to apply 20% of $135,000. You're going to plug that in here and then this is all going to auto fill. If you would rather have a set amount, let's say that you're looking for, I don't know, let's say you're looking for $7,500 up front, you'll use $7,500 as the amount that is deducted from the sales price.
That's all this means. And then if you expect to have property management on this particular property, you're going to plug that percentage in here. Normally it's about 10%, roughly. At least it is in my area. So now what we have are our actual figures.
We have our front end purchase expenses, our front end reserve requirement. We are not going to have any front end cash intake. So you're not going to be taking any cash in when you find your tenant buyer here. So I will have to change this. Let me write that down.
I will remember to do that.
So this is my total front end cash requirement, total back in profit. Now this is the calculation between what you purchased it for here and everything that you've got into it. So it'd be your purchase price plus your front end purchase expenses and your reserve requirement, you're going to subtract that from your sales price here. So your actual total back end profit is about $40,000 on this deal. Once your buyers, once your tenants buy this property, total monthly intake is $1,080.
This is going to be your monthly lease amount minus expenses. So this is your total monthly expenses. Your total monthly cash flow on this is $260 per month, cash on cash return of 31.0. And again, here's your cap rate and your loan constant. And this is definitely still a deal.
If you choose to do lease option, this would definitely work out for you as well.
If we go to our rental, it gets even simpler. Monthly lease amount, $1,200. Security deposit on a rental is usually one month rent. So $1,200. Let's say this is a twelve month term.
You're not paying any utilities and you're doing 10% property management. So you're going to have cash in this deal. You're not going to be able to avoid it with such a small security deposit. But nevertheless, it's still a really great deal. You still got really great cash flow, a decent cash flow anyway, $260 a month.
It's going to take you 29 months to break even, to actually recoup your initial cash outlay. But it's usually not a huge deal because you've got that cash in that property. So that does add to the equity in that property. Your cash on cash return is 41%. And again, your cap rate is right here.
On the flip tab. We've got our repair estimate. Let's say it was $8,000. I'm sorry, it was one $200 percentage of repairs financed. So if you've got to do any repairs to the property, are you going to be financing any of those funds that you need to make those repairs?
That's what this is asking. Percentage of repairs financed. If it's 100%, then you're borrowing the entire $200 to make those repairs.
If there are any points for that money that you borrowed, let's say there's three points. And that loan interest rate, let's say it's 12%. And estimated months of hold time while you do the repairs, one $200. You're talking a month. Not even a month.
You're talking a weekend, really. But I'll put a month there just to be safe. And then if you have closing costs on this loan, you're going to put those here. I'm going to say, I don't know, let's say 3%. So if you flip this, if your numbers are correct and you were to flip this deal, you would be looking at a $25,254 profit.
And on this deal, that's exactly what I did. This was one of my first deals. And so I actually flipped this deal to the retail market. And that's right around where I was at. I actually walked away with a check for a lot larger than that.
But since I had to recover a lot of my expenses, but I only held this house for about a month, right around a month. So I don't think that's a bad payday for holding onto a house for a month. I know there seems like a lot has gone into this calculator, but once you understand the terminology and what we're actually looking for when we're asking all these questions, this thing can really help you be profitable on the deals that you do. Okay, guys, thanks so much for joining me here on Let's Talk subject two. If you like this video, go ahead and click the like button.
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