REISkills.com Training Report: Comprehensive Real Estate Investment Analysis and Math Skills Module
This training manual is designed to equip real estate investors with the essential mathematical and strategic skills required to accurately analyze investment properties, focusing on cash flow, valuation, expense control, and effective offer submission.
Table of Contents
Quotations from Real Estate Professionals
Chapter 1: The Foundation of Investment Math
1.1 Why Math Matters More Than Intuition
1.2 The Primary Investment Factors: Cash Flow vs. Appreciation
1.3 Essential Investment Metrics (NOI, CoC, ROI, DCR)
Chapter 2: Analyzing Cash Flow (Income, Expenses, and Reserves)
2.1 Calculating Gross Rental Income (GRI) and Market Rent
2.2 The Comprehensive Expense Checklist
2.3 Budgeting for Reserves (Vacancy, Repairs, and CapEx)
2.4 Calculating True Cash Flow
Chapter 3: Property Valuation and After Repaired Value (ARV)
3.1 The Sales Comparison Approach (CMA Methodology)
3.2 Adjusting Comparable Sales Prices
3.3 Alternative Valuation Methods (Income and Cost Approaches)
3.4 Determining the After Repaired Value (ARV)
Chapter 4: Due Diligence, Repair Estimation, and Risk Mitigation
4.1 Repair Estimation Methodology (Quick Guesstimate vs. Detailed Quote)
4.2 Adjusting Repair Quality Based on Exit Strategy
4.3 Estimating Detailed Component Costs
4.4 Site Analysis and Environmental Hazards (Flood Risk, Contamination)
Chapter 5: Deal Calculation and Offer Strategy
5.1 Calculating Offers for Wholesale and Retail Deals
5.2 Closing and Holding Cost Estimation
5.3 Strategies for Private Sellers (Multiple Offers)
5.4 Strategies for Banks (REOs) and Necessary Addendums
Glossary of Investment Terms (Sorted by Category)
REISkills Training To Do List
REISkills Resource Links
Conclusion: Taking Consistent Action
Quotations from Real Estate Professionals
- “If you don’t have the right math going into a deal, you’ll never get the right profit coming out of it.” — This highlights the central importance of rigorous calculation in real estate investing, contrasting it with relying on intuition.
- “Buying a bad deal is like getting into a bad marriage. Separation is difficult, expensive, and stressful.” — This analogy underscores the long-term negative consequences of failing to calculate all the numbers on an investment property.
- “I assume any appreciation is ‘icing on the cake’ and not the goal.” — This reflects the mindset of a “buy and hold” investor who prioritizes immediate cash flow over hard-to-estimate future appreciation.
- “LIFE DOESN’T GET BETTER BY CHANCE, IT GET’S BETTER BY CHANGE.” — This encourages investors to take decisive action toward their financial goals.
Chapter 1: The Foundation of Investment Math
1.1 Why Math Matters More Than Intuition
Many people spend longer choosing their clothes in the morning than they spend calculating their next real estate investment. Relying on intuition or buying a property simply because it feels right can lead to financial failure. A firm understanding and regular practice of investment math are the ultimate goal for making the best investment possible. Failing to calculate the right math results in deals that become “a thorn in your side for years to come”.
1.2 The Primary Investment Factors: Cash Flow vs. Appreciation
When analyzing a rental property, the two most important factors are Cash Flow and Appreciation.
- Cash Flow: Simply defined as the money left over after all the bills have been paid.
- Appreciation: The equity gained as the property value increases.
Due to the difficulty in accurately estimating future appreciation “without a crystal ball,” many successful investors focus primarily on generating cash flow, treating appreciation as “icing on the cake”.
1.3 Essential Investment Metrics (NOI, CoCRoI, DCR)
Sophisticated investors use deeper math to evaluate performance:
- Net Operating Income (NOI): The amount of money remaining after all property expenses are paid, excluding debt service (the mortgage payment).
- Cash on Cash Return on Investment (CoCRoI): This metric determines the yield an investor’s cash makes based solely on cash flow (ignoring appreciation). It is calculated as the ratio between the Total Annual Cash Flow and the Total Investment: .
- Debt Coverage Ratio (DCR): A key metric that compares the NOI to the debt service.
- Cap Rate (Capitalization Rate): A metric found in deeper analysis tools.
NOI, Cash-on-Cash Return (CoC), and Debt Coverage Ratio (DCR).
Let’s establish a baseline scenario for our example property:
- Property Purchase Price: $250,000
- Down Payment (20%): $50,000
- Loan Amount (Mortgage): $200,000
- Interest Rate: 6.5%
- Loan Term: 30 years
- Monthly Principal & Interest (P&I): ~$1,264
1.3 Essential Investment Metrics
1. Net Operating Income (NOI)
What it is: The annual profit generated by a property’s operations, excluding financing costs and capital expenditures. It’s the fundamental measure of a property’s profitability.
Formula: NOI = Gross Rental Income – Operating Expenses
Example Calculation:
- Gross Rental Income:
- Monthly Rent: $2,400
- Annual Gross Rental Income: $2,400 * 12 = $28,800
- Operating Expenses (Annual):
- Property Taxes: $2,800
- Insurance: $1,200
- Management (8% of rent): $2,304
- Maintenance & Repairs: $1,500
- Vacancy Reserve (5% of rent): $1,440
- CapEx Reserve (5% of rent): $1,440
- Utilities (paid by owner): $600
- Total Operating Expenses: $11,284
NOI = $28,800 – $11,284 = $17,516
Why it matters: This tells you the property generates $17,516 of profit before considering the mortgage. It’s used to calculate the property’s value (via the Cap Rate) and is a key indicator of operational health.
2. Cash-on-Cash Return (CoC)
What it is: The annual return on the actual cash you invested. It measures the cash flow you receive relative to your initial down payment.
Formula: CoC = (Annual Pre-Tax Cash Flow / Total Cash Invested) * 100
First, we need to calculate Annual Pre-Tax Cash Flow:
- Annual NOI (from above): $17,516
- Annual Debt Service (Mortgage): $1,264 (monthly P&I) * 12 = $15,168
- Annual Pre-Tax Cash Flow: $17,516 – $15,168 = $2,348
Now, calculate CoC:
- Total Cash Invested: Down Payment ($50,000) + Closing Costs (let’s estimate $5,000) = $55,000
CoC = ($2,348 / $55,000) * 100 = 4.27%
Why it matters: This answers the question, “What percentage return am I getting on my cash this year?” In this case, your $55,000 investment is generating a 4.27% cash return, similar to a dividend yield. This is crucial for comparing real estate to other investments like stocks or bonds.
3. Debt Coverage Ratio (DCR)
What it is: A ratio that measures the property’s ability to cover its mortgage payments. Lenders use this to assess risk.
Formula: DCR = Net Operating Income (NOI) / Annual Debt Service
Using our numbers from above:
- NOI: $17,516
- Annual Debt Service: $15,168
DCR = $17,516 / $15,168 = 1.15
Why it matters: A DCR of 1.0 means the NOI exactly covers the mortgage payment—you break even on cash flow. A DCR above 1.0 means you have positive cash flow. A DCR below 1.0 means you are losing money each month.
- DCR > 1.0: Good (The property is generating enough income to pay its own mortgage).
- DCR = 1.0: Break-even (Risky, as any vacancy or repair wipes you out).
- DCR < 1.0: Bad (You must add personal funds each month to cover the shortfall).
Most commercial lenders require a DCR between 1.20 and 1.35 to ensure a safe buffer.
Summary Table for Our Example Property
| Metric | Calculation | Result | Interpretation |
| NOI | $28,800 – $11,284 | $17,516 | The property’s operational profit is strong. |
| Cash-on-Cash | ($2,348 / $55,000) * 100 | 4.27% | You are earning a 4.27% annual cash return on your investment. |
| DCR | $17,516 / $15,168 | 1.15 | The income covers the mortgage payment with a 15% buffer. |
By mastering these three calculations, an investor can quickly assess the fundamental financial health and attractiveness of any potential rental property deal.
Chapter 2: Analyzing Cash Flow (Income, Expenses, and Reserves)
The basic cash flow formula is Income – Expenses = Cash Flow. Mistakes occur when investors incorrectly define income or forget critical expenses.
2.1 Calculating Gross Rental Income (GRI) and Market Rent
- Gross Rental Income (GRI): The maximum money collectible from tenants before vacancies or expenses.
- Setting Market Rent: A Comparative Market Analysis (CMA) to Set Rent worksheet is used to estimate the monthly market rental value. This involves comparing the subject property to local rental comparables and making dollar adjustments for differences in features (e.g., amenities, square footage, and proximity).
2.2 The Comprehensive Expense Checklist
A thorough analysis must include all potential expenses, not just the mortgage.
| Expense Category | Details | Budgeting/Notes | Source(s) |
| Fixed Expenses | Taxes, Insurance (including Flood Insurance, if needed), Utilities (Water, Sewer, Garbage, Gas, Electricity, HOA Fees), Snow/Lawn Care. | Must be based on real numbers obtained from appropriate sources. | |
| Property Management (PM) | Typically 10% to 11% of rent. | Budget for PM even if self-managing. If successful, you will eventually need a manager; failing to budget means losing all cash flow when you hire one. |
2.3 Budgeting for Reserves (Vacancy, Repairs, and CapEx)
These estimated reserves are crucial for accurate cash flow projection.
- Vacancy Reserve: Budgeted for periods when the property is unrented (e.g., 5% or $50 in a sample scenario).
- Repairs Reserve: Funds for small, unforeseen maintenance (e.g., a water leak). Often budgeted at 5% to 15% of potential income.
- Capital Expenditures (CapEx): Funds for expensive, infrequent items such as roofs, appliances, driveways, or plumbing systems. CapEx is difficult to estimate but should be budgeted for, often ranging from 5% to 15% of potential income.
2.4 Calculating True Cash Flow
Once all expenses are determined (Operating Expenses + Debt Service), the true cash flow can be calculated. In a hypothetical scenario where monthly income is $1,200 and total expenses are $889.23, the monthly cash flow is $310.77, resulting in an annual cash flow of $3,729.24. This figure is then used to calculate the CoCRoI to determine if the deal is worthwhile relative to the initial investment.
Chapter 3: Property Valuation and After Repaired Value (ARV)
The investor’s primary concern is not the current appraisal value, but what the property will appraise for after it has been fixed up (ARV).
3.1 The Sales Comparison Approach (CMA Methodology)
The Comparative Market Analysis (CMA) worksheet uses the sales approach—the most popular valuation method—to estimate the ARV. This involves finding similar properties (“comps”) sold recently through County Records and viewing the properties.
3.2 Adjusting Comparable Sales Prices
The core valuation technique involves making dollar adjustments to the comparable sales price:
- Deduct the dollar value of a feature the comparable property has that the subject property does not.
- Add the dollar value of a feature the comparable property does not have that the subject property has.
Key features requiring comparison and adjustment include sales information, location (proximity to subject), type of improvements, and livable space (square footage, bedrooms, baths, amenities).
3.3 Alternative Valuation Methods (Income and Cost Approaches)
- Income Approach: Used primarily for rental properties. Value is estimated by comparing the property’s Gross Rent Multiplier (GRM) to that of similar rentals.
- Cost Approach: The least popular approach. It estimates the cost to rebuild the structure, subtracts depreciation, and adds the estimated land value.
3.4 Determining the After Repaired Value (ARV)
The ARV estimate must be close (within a few thousand dollars) to calculate a safe offer. Two basic methods are often used to get a rough ARV:
- Average Sales Prices: Average the sales prices of three similar comps.
- Estimated Value by Square Footage: Calculate the average cost per square foot of the comps and multiply it by the square footage of the subject property.
The lowest safe estimate should be used to calculate the maximum safe purchase offer.
Chapter 4: Due Diligence, Repair Estimation, and Risk Mitigation
4.1 Repair Estimation Methodology
Estimating repairs aims for a ballpark figure (rounded to the nearest $1,000). Investors seek “deferred maintenance” (neglected repairs). Experienced investors can perform a repair estimate quickly in their head by walking through the house. Newer investors should use a “Repair Estimate Worksheet” until they become comfortable. All estimates should include a “hedge factor” of an extra 5% to 10% to cover unforeseen costs.
4.2 Adjusting Repair Quality Based on Exit Strategy
The quality and expense of repairs depend entirely on the final use:
- Wholesaling: Avoid repairs entirely, flipping the property “as-is”. Only perform quick fixes (e.g., patching a leaky roof) to increase investor interest, limiting work to about one day for two people.
- Retailing (Flipping): Repairs must be “top-notch,” including nice light fixtures and new carpet, to maximize resale value to a homebuyer.
- Rental Property: Prioritize durability (e.g., commercial grade linoleum/carpet, satin paint) to reduce long-term maintenance costs.
4.3 Estimating Detailed Component Costs
A proper analysis estimates costs for major components, such as a full roof replacement ($1,800 to 700 to 1,800 to 50 to $75) before purchasing, noting that a live infestation helps drive down the price.
4.4 Site Analysis and Environmental Hazards (Flood Risk, Contamination)
Thorough due diligence includes checking environmental and geographical factors.
- Flood Risk: Properties are designated by zone (e.g., Zone X), indicating if they are OUT of the Special Flood Hazard Area (SFHA). Zone X is outside the 1% and 0.2% annual chance floodplains.
- Contaminated Sites: Specialized reports provide proximity data for contaminated sites (e.g., EVERMAN QUARRY at .3 miles) and determine status (e.g., NFRAP, meaning No Further Remediation Action Planned).
- Hazardous Waste: Proximity to facilities handling hazardous waste (RCRIS) is mapped, including those designated as Conditionally Exempted Small Quantity Generators (CESQG).
Chapter 5: Deal Calculation and Offer Strategy
5.1 Calculating Offers for Wholesale and Retail Deals
The first step in calculating any deal is determining the exit strategy.
- Retail Deals: The highest allowable offer is calculated by subtracting estimated repairs, closing costs (buying and selling), holding costs, and the required profit margin from the ARV. The profit margin should be a flat figure (e.g., $20,000 for properties under $100,000) or at least 20% of retail value for properties over $100,000.
- Wholesale Deals: The maximum allowable offer is calculated based on what the wholesale client (retailer or landlord) would be willing to pay. The investor then subtracts their desired wholesale fee (e.g., $3,000 to $5,000) from this maximum price to find their offer price to the seller.
5.2 Closing and Holding Cost Estimation
- Closing Costs: Factor in costs for both buying and selling, generally summing up to about 4% of the retail value.
- Holding Costs: Consist mainly of mortgage payments, hazard insurance, and utilities, estimated for the time until resale. It is generally advised to plan for at least six months of mortgage payments.
5.3 Strategies for Private Sellers (Multiple Offers)
When dealing with private sellers, the investor should present a solution to their problem. An effective strategy is the multiple offer strategy, giving the seller two or three distinct options:
- An All Cash Offer.
- A Money Now/Money Later offer (immediate cash plus deferred payments).
- Creative Financing Terms (e.g., Subject To, Lease Option, or Seller Carryback Note).
The investor should ensure both spouses are present when presenting an offer.
5.4 Strategies for Banks (REOs) and Necessary Addendums
Banks prioritize liquidation and require a different approach.
- Submission: Banks prefer “all cash” with “no contingencies”. Initial offers may be requested verbally or via a brief fax letter to avoid paperwork.
- Pricing Tactics: Do not base the bid on the bank’s original loan amount. To increase acceptance chances, bid a rounded-up figure and bump the bid by a small amount (e.g., $100 or $50).
- Required Addendums: Banks require an “as is” disclosure. If the contract includes an assignment restriction, the investor planning to flip should use a double closing instead of assigning the contract.
- Follow-Up: Banks rarely follow up on rejected offers, so the investor must persistently re-submit the same offer on a regular basis (e.g., every 30 days) to be in front of the bank when it decides to lower its price.
Glossary of Investment Terms (Sorted by Category)
| Category | Term | Definition | Source(s) |
| Valuation/Math | ARV (After Repaired Value) | The value a property is estimated to appraise for once fixed up. | |
| CMA (Comparable Market Analysis) | A worksheet used to estimate property value or rental rate based on adjusted comparable sales/rentals. | ||
| Gross Rent Multiplier (GRM) | Used in the Income Approach; price divided by gross rent. | ||
| Sales Approach | Valuation method relying on market-driven information from willing buyers and sellers (CMA). | ||
| Financial Metrics | Cash Flow | The money left over after all bills (income minus expenses) have been paid. | |
| Cash on Cash ROI (CoCRoI) | Ratio of total annual cash flow to total cash invested, measuring yield ignoring appreciation. | ||
| NOI (Net Operating Income) | Money left after all property expenses except debt service. | ||
| Debt Service | The money allocated toward paying the mortgage payment (principal and interest). | ||
| Hedge Factor | An extra 5-10% added to repair estimates to cover unexpected costs. | ||
| Property Condition | Capital Expenditures (CapEx) | Budgeted funds for large, infrequent replacements (e.g., roof, plumbing, appliances). | |
| Deferred Maintenance | Repairs that should have been done but were neglected. | ||
| NFRAP | No Further Remediation Action Planned (status for a contaminated site). | ||
| Transaction/Strategy | Double Closing | Executing two separate purchase agreements instead of assigning a contract, often used when banks restrict assignment. | |
| REO | Real Estate Owned by a bank/lender following foreclosure. | ||
| Subject To | Acquiring property subject to existing financing, a creative financing term. |
REISkills Training To Do List
| Task | Status | Date Completed |
| Module 1: Foundations & Mindset | ||
| Review the core importance of investment math. | ||
| Commit to focusing on cash flow first, treating appreciation as secondary. | ||
| Module 2: Cash Flow Analysis | ||
| Obtain or create a CMA worksheet to set market rent. | ||
| Calculate operating expenses, including taxes and insurance. | ||
| Budget for Property Management (10-11%) regardless of self-management plans. | ||
| Set adequate reserves for Repairs and CapEx (5-15% each). | ||
| Calculate the final Cash on Cash ROI (CoCRoI). | ||
| Module 3: Valuation | ||
| Locate three recent comparable sales (comps). | ||
| Practice making dollar adjustments to comp prices based on differences. | ||
| Calculate the estimated After Repaired Value (ARV). | ||
| Module 4: Due Diligence & Risk | ||
| Perform an initial “eyeball guesstimate” of all deferred maintenance. | ||
| Add a 5-10% “Hedge Factor” to cover unforeseen repair costs. | ||
| Obtain a termite inspection before purchase (75). | ||
| Check for environmental hazards, flood zones (SFHA), and proximity to contamination. | ||
| Module 5: Offers & Negotiation | ||
| Determine the appropriate exit strategy (Wholesale, Retail, Rental). | ||
| Calculate the maximum allowable offer (HAO) by subtracting all costs and profit. | ||
| Prepare a multiple offer strategy for private sellers. | ||
| Establish a 30-day follow-up system for rejected bank offers. |
REISkills Resource Links
The training materials frequently reference powerful tools and resources designed to simplify the real estate analysis process.
| Resource/Tool | Description | URL/Reference | Source(s) |
| Property Analysis Software/Calculators | Used to run ALL the numbers quickly, diving into deeper metrics like Cap Rate and NOI, and generating professional PDF reports. | BiggerPockets.com/analysis | |
| Analyze Worksheet/Free Toolkit | A worksheet provided to help quickly assess properties and narrow down the “cream of the crop”. | www.BiggerPockets.com/AnalyzeWorksheet | |
| Comparative Income Analysis (Form 229-2) | Standardized worksheet used to track income and expenses over consecutive years. | Form 229-2 (first tuesday) | |
| CMA Worksheets | Forms 200-1 (for setting value) and 200-2 (for setting rent). |
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| Amortization Calculators | Tools used to create amortization tables and schedules for loans, often offering customizable payment options. | Vertex42.com/ExcelTemplates/excel-amortization-spreadsheet.html |
Conclusion: Taking Consistent Action
Real estate investing is fundamentally a business where supply and demand determine bottom-line profits.
Success is not determined by passive luck but by taking action.
The essential difference between those who achieve financial independence and those who merely try and fail often boils down to consistent action and detailed analysis.
You have been provided with the tools and math necessary to analyze deals by hand, a “vitally important skill for an investor to have”.
Remember that your skills in analyzing properties will only increase with practice.
Investors should commit to taking a few moments to analyze properties each day, run the numbers, and verify that the deals are solid.
Buying a bad deal is equivalent to entering a bad marriage—separation is difficult, expensive, and stressful.
Do not buy a bad deal;
calculate ALL the numbers on your next investment property and shop smart!.
