How to Quickly Evaluate a Real Estate Deal

Edit: There is an updated version of this article and spreadsheet over on our Serial Startups website.

There is a common saying among real estate investors, “Review 100 deals, make offers on 10, purchase 1.”

When I first began investing in real estate, I could not see how this could possibly be true.  Who really goes and looks at 100 properties just to get a single deal?

It wasn’t until I was speaking with a fellow investor that I learned my mistake: you don’t physically need to see 100 deals in person, you just need to find 100 deals to evaluate.  Obviously, it takes time to evaluate 100 deals, so it makes sense to find a way to quickly evaluate deals.

I ended up creating a spreadsheet for quickly evaluating deals.  Many of the formulas that I used came from the book “What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures“.  My goal was to be able to enter a few pieces of data and quickly analyze a property using multiple formulas.  I then wanted a quick way to determine if the property was worth a further look.  Below is the breakdown of the spreadsheet that I currently use.

Property Details

The first section is pretty straightforward.  Enter basic information about the property.  Orange cells require user entry.

 

Purchase Details

The second section gets into more of the financials.  Again orange cells need to be entered.  Gray cells with orange text are calculated and black cells do not apply.  This section contains information about the property itself, the funding to purchase it and the cost to renovate it.

 

Rental Information

This section contains information about the number of rentable units and the going rate for rent in the area.  It then calculates various relevant information about the rental financials.

 

Estimated Financials

Since the point of this sheet initially is to be a quick way to evaluate deals, we use 50% as the operating expenses for the property.  This gives us a high level idea of how the investment looks.  I like to target at least $100 estimated cashflow per unit.

 

Calculated Financials (Optional at this point)

As a later step if you want to further evaluate the deal, I have a second sheet where you can break down the operating expenses, which will give you a calculation based on the actual numbers you enter for each line item.  I skip this step when doing the initial analysis.

 

Additional Analysis

This section contains some additional information which may be relevant to you.

 

Should You Purchase the Property?

And now the magic.  The numbers on the page give you a lot of information, but do not make it clear if you should pursue the property.  I have determined 3 criteria that I want my properties to achieve in order to pursue them.

1. Monthly rent (GSI) should exceed 2% of the purchase price (+ renovations)
2. Cashflow should be $100+ per unit
3. The debt coverage ratio should be greater than 1.2

Because you entered all of the information above in order to calculate these values, the spreadsheet will now tell you in simple terms if you should purchase the property.

 

If one of the values did not meet my criteria, it show up as red and provides a different recommendation.

 

What I love about this spreadsheet is how much data it generates and how easy it makes scanning through potential deals.  I have added a ton of additional functionality to provide further analysis if I decide to purchase the property, which I will outline in a future blog post.

Here is what the first tab of the spreadsheet looks like put together.

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