Are you looking for a way to analyze a rental property? Read here to find out if BiggerPockets analysis tools can help you.
Investing in a rental property can be a great way to generate income and build wealth without working all day, every day. But it is not as easy as you think. You must first know how to analyze and select properties that have high-profit potential.
Buying a rental property, whether it is your first or fifth, is a major financial decision that you should not make on impulse or with gut feeling alone. It is important to know how to determine whether a house is worth investing in using data.
This is where a rental analysis tool comes in. In this blog post, we take a closer look at the various BiggerPockets analysis tools that investors who are members of the platform can use. We will discuss:
- What is a rental property analysis tool?
- How to analyze rental property
- How to use BiggerPockets analysis tools when analyzing a property
- The best alternative to BiggerPockets analysis tools
- The data you will get from using a rental analysis tool
If you are a real estate investor who is looking for the best real estate investing tools on the market, keep reading.
What Is a Rental Property Analysis Tool?
A rental property analysis tool can help you assess the potential financial performance of a rental property. It also estimates your income and expenses, cash flow, and investment payback. Before this became available, investors had to visit the neighborhood, go door to door, and leverage their network. These steps were crucial for them to get the information they need to make a proper analysis.
While this may sound exciting, it can take days or even weeks to do, which a lot of investors may not have time for. But with rental property analysis software, you can do your comp research in minutes and without leaving your home. Of course, this kind of efficiency depends on the tool that you will use.
Having the best real estate investing tool that meets your investment needs can make a big difference to your profits. When looking for software, do not get whichever is leading because of their reputation. You must also consider whether its features meet your needs. Some tools may not be right for your preferred property type or investment strategy.
In general, here are some of the most important features to look for in a great rental analysis tool:
Ideal Rental Property Analysis Tool Features
- Handles different property types from single-family homes to multifamily properties and coops
- Designed to help investors from the beginning of their journey to when they wish to expand their portfolio
- Easy to use on both mobile and desktop, so you can access it from anywhere
- Requires little to no learning curve to search for a property, run analysis, and use other features
- Exports property reports to PDF format, making it easier for you to share the analysis with your partner investors
In the coming sections, we will determine whether BiggerPockets analysis tools meet the criteria.
How to Analyze Rental Properties
Before you learn how to analyze a rental property, you also need to understand why it is important to do so.
Why Analyze Rental Properties
Rental properties make money in two ways:
- Rental income
- Equity and value appreciation
As the property’s value rises and you pay off your mortgage, the equity or the money you have in your rental home also increases. This can then help you with future fundings.
Investors who have built equity use it to refinance their mortgage and fund their next investment. Others would sell the property for more than their outstanding mortgage balance and keep the difference. Equity also increases the total value of your portfolio and your net worth.
While it would be good to buy a rental property that can earn in both aspects, it is better to focus on earning a high rental income. This is because property value appreciation can be difficult to project. Plus, reducing your mortgage principal can be challenging in the first few years.
But if you decide to hold your rental home for decades, then its value appreciation could become the bigger source of its profitability.
Because of these considerations, you need to be smart about analyzing the rental property you intend to buy. Here are two metrics you need to measure as part of your analysis.
Cash flow is the difference between your rental income and the expenses related to owning and managing the property. While this sounds simple, many beginner investors are not sure what type of expenses to include in their calculations. Here are the most common costs to account for in your cash flow analysis:
- Mortgage payments
- Property management
- HOA fees
- Vacancy (Monthly rental divided by 30, then multiplied by the number of days that you have no tenant)
- Repair and maintenance
A good cash flow is about $100 to $200 per unit per month. So for example, if you have a duplex, you would want your cash flow to be at least $200, while a fourplex should have at least a $400 cash flow. But this should not be the only metric for determining a good investment. If you invested $1 million in a duplex, for example, and your monthly cash flow is $200, would you say you have a profitable investment?
Cash on Cash Return
To answer this question, a $1 million investment and a cash flow of $200 per month or $2,400 per year would mean your return on investment is only 0.24%. This also means that it would take you 417 years to earn back your initial investment.
So instead of relying on cash flow, successful investors have also included cash on cash returns in their analysis. A cash on cash return is the percentage of your pre-tax cash flow in a year on the cash you invested in that same period. The cash invested includes your mortgage payments as well as the down payment, closing costs, and remodeling. This metric is especially important if you are buying a property with a mortgage.
Let’s say your cash flow before taxes was $2,800 in the first year. Then you paid a total of $121,400 on the down payment, closing costs, remodeling, and mortgage payments. Your cash on cash return for this period would then be 2.31%.
You would want to get a consistent 10% cash on cash return, but this may be difficult to achieve if you have a mortgage. 2% to 4% is acceptable, 5% to 7% is good, and 8% and up would be considered a great return rate.
Tools like BiggerPockets analysis help calculate both metrics. So there is no need to do this on your own, especially if you are not confident with your math skills.
How BiggerPockets Analysis Works
BiggerPockets is a platform that offers education, tools, and community to its real estate investor members. On its website, members can learn about investing, analyze properties, and connect with real estate agents. They also have access to the following BiggerPockets analysis tools:
BiggerPockets Rental Property Calculator
BiggerPockets rental analysis calculator helps determine the profitability of a potential rental property. One of its features is to estimate the potential monthly and annual cash flow and calculate your return on investment over time. But you have to input all the variables needed for the calculator to make these estimates.
You can also create printable PDFs to show other stakeholders. The clean layout makes it easy for you to explain and for them to understand, which would help you decide on whether to invest without dilly-dallying further.
The platform promises that this calculator will help you plan for unforeseen expenses as well. But you are already inputting the variables that you need to research on your own. So you likely already know what these “unforeseen” costs could be without the calculator’s help.
BiggerPockets 70% Rule Calculator
This particular BiggerPockets deal analyzer determines whether a property is worth investing in based on the 70% rule. This rule states that you should pay no more than 70% of the house’s after-repair value (ARV). Even though it is commonly used for house flipping, investors can also follow this rule for buying rental properties. Using the 70% rule gives you a 30% margin to cover your closing costs, holding costs, and profit from renting out the house.
To use this calculator, however, you must already know the ARV of the property you intend to buy. Because BiggerPockets does not yet have this feature, you will have to use a different calculator on another platform to estimate this.
Other Real Estate Investment Calculators
Aside from the two tools mentioned above, BiggerPockets feature other calculators for different investment strategies:
- Fix and Flip Calculator
- BRRRR Calculator
- Wholesaling Calculator
- Rehab Estimator Calculator
- Mortgage Payment Calculator
The Best Alternative to BiggerPockets Analysis Tools
While investors have a variety of BiggerPockets analysis calculators to choose from, the fact that they are fragmented can make it a hassle to use. To analyze deals, you will need to have at least two calculators open. It is even more of a hassle if you need to analyze more than one property at a time. Aside from these, you also have to know the variables to include in your calculations, such as your rental income, expenses, occupancy rate, and more.
This is where Mashvisor tools come out superior. We created the platform, keeping in mind beginner and experienced real estate investors who are looking for new markets in the US. Using our heatmap, you can explore which parts of a city are the most lucrative compared to the rest.
If you are interested in several cities and cannot narrow it down to just one, you can use our Property Finder to search for properties in up to five cities. The listings will show up as one collection of results. So you would not have to open different tabs and do the math in your head to find which property among the five has the highest profitability.
When you click on a house and open its listing page, you will find our analysis and calculators there as well. But instead of making you type in the information needed to make the necessary calculations, we already put in estimates based on the data from comparable properties in the area. You may then choose to edit these numbers and our calculator will adjust the results accordingly.
Mashvisor Investment Property Analysis Tool Data
Here are the data that you will get from Mashvisor’s tools that you may put into your BiggerPockets analysis:
- Rental income: How much you will earn every month depending on your rental strategy. We estimated this amount based on comparable properties in the area.
- One-time and recurring expenses: How much you will spend on the property initially and every month thereafter. We also estimated these costs based on what are the standard amounts in the area.
- Cash flow: This is how much you will have leftover after deducting your monthly expenses from your monthly rental income.
- Cash on cash return: As mentioned earlier in this article, this is the percentage of your cash returns on the cash you invested in a year.
- Cap rate: Another way to calculate returns, but instead of just looking at cash invested, it divides the net operating income by the property’s value, which is initially the selling price.
- 10-year payback balance: This is your accumulated cash earnings after 10 years.
- Occupancy rate: This is the estimated number of days in a calendar month or year that the property may be occupied. We also calculated this based on comparable properties in the area.
If you are planning to buy the property using a mortgage, you can toggle to activate our mortgage calculator to incorporate your loan details in the investment property analysis. Just input your purchase price, down payment amount, mortgage type, loan term, and interest rate.
Analysis Based on the Investment Strategy
Note that we have different numbers for either Airbnb or traditional rental strategy. This is because they tend to generate different returns depending on where your rental property is located. For example, a property in Old Fourth Ward, Atlanta, GA may generate 5.74% cash on cash returns for traditional lease and 5.60% for Airbnb.
Both strategies may require different expenses as well. For a traditional lease, you will not have to pay the utilities and cleaning fees. Meanwhile, Airbnbs and other short-term rentals can incur costs for utilities, cleaning fees, supplies, and lodging taxes.
Making Money in Real Estate Is Easy When You Use the Right Tools
BiggerPockets analysis tools are perfect for investors who already know what to do and how much to charge or spend on the property they wish to invest in. However, if you are new to the industry or want to explore markets that you are not familiar with, Mashvisor can help you search and analyze your next investment. To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.