Step by Step Guide to Crunching the Numbers for RECFH Real Estate Entrepreneurs

I realize that everyone wants to cut straight to the chase and learn how to analyze deals because some people falsely believe that's what makes the money start rolling in. It appears to be fun for some to play with the numbers and the fancy spreadsheets.

Yes, analyzing deals is important but it's certainly not what drives the money machine!

First of all, analyzing deals can be delegated and if a task can be delegated it is usually not the most important cog in the wheel - especially for the entrepreneur.

Everyone and I mean everyone depends on the entrepreneur to show up with the most important of the 3 essential components of a profitable cash flow project;  EXPERTISE (leadership, vision, team, experience, knowledge & application skills).

Hands down, the most significant skill of a real estate entrepreneur (any entrepreneur for that matter) is RAISING CAPITAL. Fortunately for us, the RECFH membership organization, in and of itself, is essentially an innovative method of raising capital.

With that said, let's get on with our conversation about deal analysis:

You'll soon find that once the word gets out about what you do, there will be many people bringing you potential deals to look at. Nevertheless, you must continually spread the word about what type of deals you're looking for and be on the lookout for potential Inner Circle members to invite as well.

NOTE: It's always a balancing act for the RECFH Real Estate Entrepreneur between having too many cash flow projects and having too much capital (both are good problems to have but challenging nonetheless).

FOUR STEPS TO CRUNCHING THE NUMBERS

A fellow RECFH Member recently brought me a lead on a residential lot that he believed was a good deal for a new construction project. We had just completed a rehab project in that particular neighborhood so it didn't take me long to confirm his conclusion:

When looking at the raw numbers, the profit formula is relatively simple:

Spread - Expenses - Participant Payouts = Profit

NOTE: Don't fret - we have a spreadsheet to calculate spread, expenses, and profits (you determine the participant payouts) but if it helps to understand the method behind the madness.

STEP ONE: Calculate The Spread

The spread is the difference between the purchase price and the after repair value (ARV). First and foremost, it's up to YOU, as the Real Estate Entrepreneur, to verify or confirm exactly what the spread is on each and every project.

In this case, there were actually two spreads; the lot spread, and the building structure spread.

The lot price had already been negotiated to $25,000 whereas the market value was $40,000 -
a spread of $15,000 [$40,000 - $25,000].

The building cost for a 2,200 s.f. house will be $187,000 [$85s.f. x $2,200 s. f.] with a market value of $275,000 ($125/s. f. x 2,200 s.f.) -
a spread of $48,000 [$275,000 - $187,000 - $40,000]

STEP TWO: Calculate the Expenses

The expenses include the purchase and resale closing costs plus carrying costs (Interest, Taxes, Util. etc.). It's important not to overlook any expenses. Especially when you have multiple closings taking place in your project.

Lot & Construction Closing Costs - $7,500

Carrying Costs - $9,500

Total  - $227,000 [Construction Cost + Lot Cost]

Down Payment - $45,400 (20% of $227k)
Loan Amount - $181,600 Estimated timeline - 6 months

STEP THREE: Calculate Your Participant Payouts

JV Partner(s) provide $60,000 to cover Down Payment & Carry/Closing Costs/Misc. JV Partner(s) - Profit $7,500  ANNUALIZED ROI: 25%

STEP FOUR: The Result is Your PROFIT!

$275,000 - Sales Price
- $9,500 - Carrying costs
- $181,600 - loan balance
- $5,000 - Closing Costs
- $60,000 - JV Partner(s) return OF principal
- $7,500 - JV Partners return ON investment

$11,400 - Profit from Sale of Property
+
$15,000 from wholesale of lot

$26,400 Total Profit for YOU the Real Estate Entrepreneur


Good Hunting!