Are you looking for a way to analyze a rental property? Read on to learn more about BiggerPockets and see how its 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 with high profit potential.
Table of Contents
- Why Analyze Rental Properties
- How to Analyze Rental Properties
- What Is a Rental Property Analysis Tool?
- How BiggerPockets Analysis Works
- The Best Alternative to BiggerPockets Analysis Tools
Buying a rental property, whether it is your first or fifth, is a major financial decision 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.
If you are a real estate investor looking for the best real estate investing tools on the market, keep reading.
Related: Real Estate ROI Calculator vs Excel Spreadsheets—Which Is Better?
Why Analyze Rental Properties
Before you learn how to analyze a rental property, you also need to understand why it is important to do so.
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 funding.
Investors who have built equity use it to refinance their mortgage and fund their next investment. Others would sell the property in the marketplace for more than their outstanding mortgage balance and keep the difference. Equity also increases the total value of your portfolio and your net worth.
The period of return on investment will depend on your investment strategy. Many investors prefer to get their ROI plus profit in as quickly as possible, so they go into house flipping. Others are willing to hold on to an investment property for a longer period; thus, they use the BRRRR strategy or start a rental property business.
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. It is because property value appreciation can be difficult to project in any real estate marketplace. Plus, reducing your mortgage principal can be challenging in the first few years.
But if you decide to hold your rental home for decades, its value appreciation could become the bigger source of its profitability. It is why a lot of investors prefer to go with a BRRRR or rental strategy. It allows them to build equity and generate a steady money source simultaneously.
How to Analyze Rental Properties
Because of the considerations mentioned in the previous section, you need to be smart about analyzing the rental property you intend to buy. Here are a few metrics you need to measure for 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 it would take you 417 years to earn back your initial investment.
So instead of relying on cash flow, successful investors have included cash on cash returns in their analysis.
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. Thus, 2% to 4% is acceptable, 5% to 7% is good, and 8% and up would be considered a great return rate.
Tools like BiggerPockets rental property calculator 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.
Related: How to Find Profitable Rental Investment Properties for Sale
Let’s say, for instance, you have enough money to make an all-cash transaction on an investment property. You are then to use the cap rate to determine the real estate property’s profitability instead of cash on cash return.
The cap rate is another metric that real estate investors and professionals use to see whether a piece of property is worth investing in or not. But many misinformed investors use it interchangeably with cash on cash return, thinking they are synonymous with each other.
While the cap rate does seem very close to cash on cash return, it does not take into account financing options for acquiring a real estate property.
Cash on cash return takes a real estate property’s net operating income (NOI) and divides it by the total amount of money put in as an initial investment. Cap rate, on the other hand, divides the NOI by the property’s market value.
Just like computing cash on cash return, you can use BiggerPockets’ rental property calculator or any investment property calculator from any site online to help you do the math.
Another metric to watch out for is the occupancy rate. It is especially important if you plan to have real estate properties listed on Airbnb.com and other similar websites.
Rental properties earn money as long as they are occupied. Any vacancy period will still cost you some money on operating costs and other required expenses like mortgages and HOA fees. The goal of every rental property owner is to have their rental property occupied for the most amount of time to counter the continuing costs of operating a long term or Airbnb rental.
Quite obviously, this metric is not made for investment strategies like house flipping and BRRRR. It measures the period wherein a rental property is occupied versus the period it is available for rent. It is not to be confused with how occupancy rates are computed for hotels and other multi-room accommodations.
Occupancy rate is the bread and butter of short term rentals like those listed on Airbnb, Vrbo, and other similar websites. If you’re interested in buying a real estate property and converting it into a vacation rental, this is something you need to learn how to compute. You can easily do this using the BiggerPockets Airbnb calculator or a better alternative.
Related: How to Use Airbnb Predictive Analytics to Earn a High ROI
What Is a Rental Property Analysis Tool?
A rental property analysis tool is a real estate investment tool that can help you assess the potential financial performance of a rental property. It also estimates your income, expenses, cash flow, and investment payback.
Before the tool became available, investors needed to visit the neighborhood, go door to door, and leverage their network. The steps were crucial for them to get the information they needed to make a proper analysis.
While this may sound exciting, it is also very exhausting and time-consuming. 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 real estate investing tool 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 just get whichever is leading based on reputation.
You must also consider whether its features meet your needs. Some real estate investing tools may not be right for your preferred property type or investment strategy. Some may work with real estate investors who wish to go with a BRRRR strategy, while others may not. Some are best suited for rental properties, while others just won’t work on this type of 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 real estate property types, from single-family homes to multifamily properties and coops
- Designed to help real estate investors from the beginning of their journey to when they wish to expand their portfolio
- Easy to use on both mobile and desktop so that 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, like its calculator, meet the criteria.
How BiggerPockets Analysis Works
BiggerPockets is a platform that offers education, tools, and community to its real estate investor members. It offers real estate investors access to a wealth of information through its podcasts, forums, and reviews.
The company was founded by Joshua Dorkin in 2004, who has since left to focus on other things. Since it was founded, the platform has grown its media presence, which includes a strong online presence on Instagram (thanks to Brandon Turner). It also has a very successful podcast with a large audience.
The podcast is currently being co-hosted by Rob Abasolo, a 12-time Airbnb Superhost and tiny house builder, alongside experienced real estate professional David Greene. David Greene is also the author of four bestselling books to date. These are just a few of the brilliant minds behind BiggerPockets.
On its website, members can learn about investing, analyzing properties, and connecting with real estate agents. Real estate investors are also given access to the following BiggerPockets analysis tools:
BiggerPockets Rental Property Calculator
BiggerPockets Rental Analysis Calculator is a tool that 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 the return on your real estate 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
The BiggerPockets 70% Rule Calculator is another valuable tool that real estate investors find quite helpful. This particular BiggerPockets deal analyzer determines whether a property is worth investing in based on the 70% Rule.
The 70% 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 use 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 real estate 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 also features 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 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 real estate properties in up to ten cities. The listings will show up as one collection of results. So you don’t have to open different tabs and do the math in your head to find which property among the ten 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.
Get started on your way to a thriving real estate investing career with a 7-day free trial period today with Mashvisor, the best alternative to BiggerPockets.
Mashvisor Investment Property Analysis Tool Data
Here is the data you will get from Mashvisor’s tools that you may put into your BiggerPockets analysis:
- Rental income: How much you earn every month depends on your rental strategy. We estimated this amount based on comparable properties in the area.
- One-time and recurring expenses: These are how much you will spend on the property initially and every month after that. We also estimated these costs based on what are the standard amounts in the area.
- Cash flow: This is how much you will have left over 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: This is 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 long term or short term rental strategies. It is because they tend to generate different returns depending on where your rental property is located. For example, a property in Atlanta, GA may generate 4.31% cash on cash returns for long term rentals and only 0.21% for vacation rentals.
Both strategies may require different expenses as well. For long term rentals, you will not have to pay the utilities and cleaning fees. Meanwhile, 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. As a real estate investor, you may find them useful depending on your investment strategy.
Keep in mind that its tools may not work with all types of investment strategies. Its calculator may work on estimating your ROI on a rental property, but it might not do you any good if you go with the BRRRR method. And while BiggerPockets’ tools can be extremely useful, you may want to consider other alternatives.
This is where Mashvisor comes in. 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, regardless of investment strategy. If you’re simply in the market looking for rental properties to buy, then you’ve come to the right place.
Learn more about why Mashvisor is the best alternative to BiggerPockets and how it can help you find the best deals in the most profitable markets by scheduling a demo now.