Hey Daniil Kleyman here, and this is going to be another awesome case study for you. This time we’re gonna be talking about wholesaling a rental property, specifically, and we’re going to go through some terminology relevant to rental properties. I’m going to go through some numbers, and the case study, and then we’re going to talk about how to properly market these types of deals. So this is a very important topic because, if you’re wholesaling or if you’re looking to get into wholesaling, you need to understand when to wholesale rentals versus flips, and how that process is different, and how your buyers approach each type of property.

So many need people, not everybody, but I see a lot of people only focus on wholesaling, what I call flip eligible deals. So most wholesalers look for properties that they can wholesale to their cash buyers, and their cash buyers are usually flippers. They’re somebody that can take that house, renovate it, and flip it to a retail buyer. Now, only focusing on flip eligible wholesale deals is a mistake. You should not neglect rentals as a source of wholesale deals. Now, wholesale rentals versus flips, they’re not going to be the same. Your buyer segment will differ.

There is a completely separate segment of buyers there that look for rental properties. They don’t really flip. I’m actually one of them. I, for the most part, buy rentals or build rentals. Now, your deal valuation method will also differ, right? The numbers that your buyers care about when it comes to rentals are not the same numbers in the same metrics that your buyers look at for flips, and it’s important you understand that. And the way you communicate and presented deals is going to differ as well. So understanding these distinctions is going to allow you to make a lot more money in this business, and it just requires taking a slightly more intelligent approach than what I see most wholesalers … the approach that most wholesalers I see take.

So in this case study, we’re going to talk about when to wholesale flips versus when to wholesale rentals. We’re going to go through the terminology. I need you to take a lot of notes here because I’m going to really go deep into the math here, and we’re going to go through a detailed case study, how to determine the right offer, how to calculate which your buyer will make in terms of profits, and how to properly and quickly and effectively and easily present your deal to your buyer list, and even how to build your buyer list using the methods that I’m going to show you.

This is really powerful stuff and I do these case studies for a couple of reasons. First, I want to educate for free. There is a lot of misconceptions about wholesaling. There’s love fluff and a lot of … really a lot of bullshit out there, and I want to cut through all of the crap that’s out there and really show you the the key things that you need to understand in order to do this business because, in reality, wholesaling and even deal valuation, the things that we really advocate, they’re not complicated, but there is really no need to go and buy a thousand dollar course to understand the stuff.

So I want to educate for free in a quick, concise manner. If you already have our free house flipping software called the Rehab Valuator Life, you may be watching this video after getting one of my emails after signing up for this software, I want to get you actually using the software. It’s incredibly powerful, even the free version, and it will allow you to approach this business in a much more intelligent way than most people do, and it will save you a huge amount of time and prevent you from making a lot of costly mistakes. And, if you already have our free software, I’m going to show you a couple of cool features of our premium software. Really, my secret evil goal here is to get you to upgrade and become one of our premium members because the things that our premium software allows you to do are truly, truly mind blowing. And I’ll show you some of those things.

So my promise to you is that none of my case studies are going to be sales pitches in any way. On every case study I do, I am going to give you a ton of useful content, things that you can go out and you can implement. By the way, if you’re watching this on YouTube or in one of our social media channels, at the end of this case study, I’m going to give you a link where you can sign up for the free software, and it’s far better than most paid software programs out there. So stay tuned. So I guess first, let’s talk about briefly while this wholesaling, because again, there’s thousand dollar courses out there about wholesaling and you really don’t need that. Wholesaling is not a complicated business. It’s very simple. You go out and you find a deal at a discount to market value.

That’s the key. You need to find a deal, not at market value, but at discount to today’s market value. Usually, in order to get a good discount, this will be a property that requires some work, though not necessarily. You put that deal under contract. So now you have a contract in your hand. You usually put down very, very small deposit, five, 10, 50 bucks, 100 bucks at most, with the seller or with your title company, and then you take that contract and you find the cash buyer, and then you simply sign or flip that contract to the buyer who will end up closing that deal. So you need two pieces of … you need two documents. You need a sales contract and you need an assignment of contract, very simple legal documents. And then at closing, you will typically … your cash buyer will go directly close with the seller and then you will collect your assignment fee, which gets wired to your or you collect it as a check.

It’s a very simple business, at least in terms of process, right? If you want more understanding of what wholesaling is and how to do wholesaling, go the rehabvaluator.com/wholesaling-101. Don’t go there now. Watch this case study, but write down this link and save it because there I have a detailed free wholesaling course that I’m constantly adding more and more chapters to. So, when to wholesale flips versus rentals. Now you need to understand your market. Some properties, they simply, in certain neighborhoods, they simply won’t make good retail flips for investors there. You need to go out and you need to look where are retail buyer’s, homeowner is buying houses.

Look at your market data. Certain neighborhoods just will not make sense for retail flips. There is no real retail buyer activity there. Now that doesn’t mean that there is no buyers for those properties because a lot of those blue color neighborhoods where you may not make a large profit margin on the flip, those properties will make great rentals, and I guarantee you there is a lot of people that are just buying rentals in those neighborhoods. So you need to understand the price range of what rental buyers look at versus your retail buyers.

You need to look at your retail demand and you need to look at your demographics. There’s going to be some areas where there’s going to be primarily flips going on, and some areas, usually lower price points, where you’ll have buyers focusing on getting cashflow properties and holding those properties as rentals. So again, you need to know how to take advantage of both opportunities, and you need to know who your rental buyers are. The key to wholesaling really is, before you do anything else, go out and get to know buyers. Find out exactly what buyers are looking for and you will meet some buyers that are only doing flips, and you’ll need to target one area for those buyers, and you’re going to meet a bunch of other buyers that are only buying rentals. They just care about cashflow, and there’s going to be completely different neighborhoods that you may want to focus on to look for rental deals for those buyers.

So let’s talk about terminology, and again, I’m going to go through stuff very quickly. Please take notes. General wholesaling terminology, like after repair value, comparable sales, percent of ARV, et cetera, were covered in the previous case study. If you’re on my email list, I emailed you that case study a few days ago. If not, then use the link I give you the end of this case study. Sign up for our free software and you’ll get access to all of my case studies. If you’re watching this on YouTube, you also may be able to find that case study on our channel, but let’s talk about terms specifically dealing with rentals.

Rental buyers care or should care primarily about two things. These are the things that I care about because I own a large rental portfolio. I’m constantly adding to, and there is really primarily two things when I’m buying a deal or rehabbing a deal that I care about when it comes to rentals. One, the sweat equity. How much of a discount to current today’s market value can I get either right now, if I’m buying something already in decent shape, or after my rehab is done.

It’s very simple. I want to be able to pay for 50, put 20 into it, and have the market value be 100. Again, I want to be able to buy something for 50, put another 20 or 25 into it, and now have my market value be 100. That way I’ve now achieved what I call, what many people call sweat equity. I didn’t buy something at market value. I built up equity through doing the renovation, and I care about cashflow today. After I get done the rehabbing and they put a tenant into this property, after I collect my rent and I pay my mortgage, real estate taxes, insurance, maintenance, other operating costs. How much money is left over every month after all of my expenses and even me putting some money into reserves? How much are my cash flow?

Before the market crashed back in ’08, ’09, people used to buy rental properties that had zero cash flow, sometimes negative cashflow, and they expected appreciation, and they expected rents to grow over time, and eventually their cashflow would become positive. That’s a crazy, crazy, insane, dangerous way to invest. So any smart rental buyer will not buy something that doesn’t cashflow today significantly. So how do we determine how much is good cashflow? Now, there’s also going to be appreciation potential, but to me that’s secondary. Again, buying strictly for appreciation is a fool’s game. Hoping for appreciation as your primary means of making money is a fool’s game. When I buy rental properties, I have equity today. I’ve made money today off of that equity, and I have cashflow today. I don’t wait for that to show up.

So let’s talk about some math. Let’s talk about net operating income. Net operating income is simply you collect your rental income and you pay out all of your operating expenses, and your operating expenses will include the real estate taxes, insurance, maintenance, legal reserves, et cetera. So you collect your rent and you pay out every expense you can think of that you encounter. You’ll always have taxes and insurance, but you’re also going to have some maintenance. You’re going to have legal marketing expenses, landscaping, whatever that is. After you pay all that out, you’re left with your net operating income every month.

So now, if you take that net operating income on a monthly basis and you multiply it by 12, you now have your annual net operating income, and you can calculate your cap rate. Now, cap rate is a term that you will very often see in commercial real estate. A lot of people don’t use or don’t look at cap rate for residential properties, single family houses, duplexes.

I do. I still think it’s a very good measure of how my property will perform before looking at my debt. So again, to calculate your cap rate, and if you really want to sound intelligent when talking to people, especially bigger investors, you need to understand cap rates. Take your net operating income on a monthly basis, multiply by 12, you get your annual, and then divide it by your total cost basis of the property. Or you can take your net operating income and divided by the market value. So I’ll show you how to calculate both of these in the real life example, but there’s two ways I look at cap rates. I look at a cap rate as a percentage of my cost basis. And so you can tell by the formula, the higher your net operating income is, the higher your cap rate. Or you can divide that NOI by the market value of the property.

So, cap rate tells you how the property will perform before taking any kind of financing into account. Cap rates are good for comparing apples to apples, two, three properties without worrying about financing. How do they compare? How do they stack up? Then what you’re going to calculate is your cashflow. You’re going to take your net operating income on a monthly basis and you’re going to subtract your mortgage payment, your debt service, and that’s the true cash that you have left over every month. And then you’re going to calculate your cash and cash return. You’re going to take that cashflow and divide it by actual cash you have invested in the deal.

So I’m going to give you a numeric example of this in the second. Now, there are other terms, but the three above are ones you really need to understand for the time being. If you learn what we talked about in the slide above, then congratulations. You’re now ahead of 97% of other investors out there. So let’s look at the case study. You find an off market house from marketing campaign. It’s three bedrooms, one and a half baths, 1100 square feet. You’ve determined by looking at comparable sales of properties that are already in good condition, renovated, the after repair value is $100,000.

Houses like this in good rental condition sell for $100,000 in this neighborhood. You determine that the property needs $20,000 in repairs to rent, and similar houses in the neighborhood rent for $1,100 a month. And because you know your buyers, you’ve determined that your buyers like to be at least at 80% of after repair value as their total cost basis. So acquisition, closing, holding costs, plus rehab altogether should not be more than 80% of the new appraisal once they’re done with the renovations. And your buyers want a minimum of $300,000 a month in cashflow.

And then, from talking to the seller, you determine that the seller wants $70,000 for the house. So what do you do? Okay, so the first thing we’re going to do is login to our software. If you log in, whether it’s the free or the premium version of the software, you’re going to end up in this screen with the orientation video, and then all of your deals saved here. You’re going to go to the quick offer calculator. The first thing we need to do is determine what we can offer the seller based on the numbers that we just talked about.

So we’ve determined that the after repair value is $100,000. The maximum cost basis that your buyer is willing to be at is 80% of that $100,000. The deal will require a $20,000 in the renovations to make it a rentable property. We’re going to assume, I usually assume for a cash deal of that size, usually around $2,000 in closing costs and closing costs to sell because this is not going to be a flip. We’re going to leave that at zero, and holding costs for the duration of the rehab, let’s put in $1,000.

While you can immediately see the maximum offer that you can make if you were buying this deal would be $57,000, but you’re going to wholesale this to your cash buyer, so you need to take that wholesale fee into account. So if you want to make $5,000, the maximum that you can offer the seller is $52,000, and if we look at our slides, we said that the buyer wanted $70,000 for the house. But the most you can offer him is going to be 52. Now let’s do 70 check about the cashflow. We said that the property will rent for $1,100 dollars a month, and you’re going to have to make some assumptions about expenses. What are real estate, taxes, insurance and maintenance going to cost you for this deal.

Let’s just ballpark that at $300. You can find real estate tax information from your local county data. Insurance, you will have to ballpark, and for maintenance, if the property is already renovated in good shape, it’s always a good idea to still assume 100, 150 bucks in maintenance. So let’s just be conservative and assume $400 in costs here. So we can’t really determine what the buyer’s cashflow will be because we don’t know how they will finance this deal, but if they just buy it with cash, they’re going to earn a 10 and a half percent return on their money … ongoing on an annual basis. And that’s our cap rate based on the cost.

So let’s assume you’ve gone back to the seller and you offered him $52,000 and the seller accepted. Here’s what you do next. You would go and click on the new deal. In my case, I’ve already got this deal under my saved deals. You would go in here and you would plug this deal in very quickly and run a little bit more of an in depth analysis and generate some marketing fliers. So you’re going to offer the seller $52,000, but you’re going to tack on a $5,000 wholesale fee on top of it. So, to your seller, you’re going to sell this deal for $57,000. Your closing costs will be $2,000, and your holding costs will be $1,000.

And once you get into the software, we have detailed video tutorials that you click a button, click this little video button, and the detailed tutorial on every section of the software pops up. Your rehab budget is already set at $20,000. You’re going to assume two months to renovate, and for now, let’s just assume a cash deal. You’re going to go to exit strategy two, which is holding rent analysis. You’re going to plug in your after repair value, how many months it’s going to take the rent after the rehab is done. Let’s assume two.

And there, all your analysis is done with the exception of let’s now enter your projected income. It’s a one bedroom … or I mean a three bedroom house, 1100 square feet. It’s going to generate $1,100 a month in rent, and for now we’ll assume vacancy of 0%. Your operating expenses are going to be, let’s assume $50 a month for insurance, $100 a month for taxes, and then another 200 for maintenance. No, let’s ignore the management fee for now. So that’s just exactly what we talked about. Your income is 1100, operating expenses are 350. Let’s be conservative and assume $400 in expenses.
You can see your net operating income is $700 a month. Your monthly cashflow is $700 if the deal is ball with cash. And then you can see here your cap rate based on cost is 10 and a half percent, and your capitalization rate based on the after repair value on the higher number is 8.4. So these are some good sanity checks. What the rate of return is your buyer going to generate? You’ll know what kind of financing they’re going to use, so look at it as a cash deal. They’re going to make 700 bucks a month and make 10 and a half percent return on their money.

Here’s what you would do next. This is where the software gets really powerful. You would click view reports, and if you just have the light, the free version of the software, you can still generate a marketing report. You Click on the project summary, and you’re going to generate a summary that looks like this project summary hold and rent. And this shows your buyer the basics in the deal. They’re going to purchase it for 57,000, put 20,000 into it, 3000 in costs. Total cost basis is $80,000, which is 80% of the after repair value. They’re going to make 700 bucks a month at a 10 and a half percent return, and you can then click get unique link and generate the link that you can email or post online, and it takes them directly to the summary.

You can send this to your entire buyers list. You can click show pdf and it creates a pdf document that you can save or you can print. You can click on the Facebook button and share this directly to Facebook. You can click on the Twitter, LinkedIn, or almost 300 other ways in which you can share this deal and immediately blast this out to your entire buyers list. Or you can post this on social media and build your buyers list. But here’s where the software gets much more powerful. If you have the premium version of the software, you can click on view reports, and you can generate a full presentation for hold, and you can generate the presentation that looks like this. If we click show pdf, this is what it looks like.

You’ve got a cover page with a picture in the description, your contact information here, and you can upload your company logo. You have a one page marketing flyer and let’s go back to this marketing flyer and add a couple of pictures. So this marketing flyer shows your buyer exactly what they need to see about this deal. All of the numbers are right here for them to see. This is all generated for you. To create these marketing reports, you need to do nothing else other than go in here and upload the couple of pictures, and look how you see uploading pictures is. We go here. Let’s go to pictures. I’m actually showing you a deal that I did recently, that I bought. It’s now a rental property that I own. We’ll go, we upload a couple of before pictures.

You have a cashflow summary, you have a comparable sales report, and then you have a page with additional pics. So this is where the full presentation looks like, that you can share the rate in the matter of seconds and blast out to your buyers. Look at this. You’ve got the cover page. You’ve got the marketing sheet, which shows your buyers exactly the numbers that they need to see in order to make a decision about this deal, whether it’s a good deal or a bad deal. You’ve got a quick cashflow summary that you can include. You’ve got a comparable sales report. You told your buyers the after repair value is $100,000. Now you’re using the comparable sales report to back that information up. And then you’ve got a page here with additional pictures that looks like this.

And again, you can save this as a pdf and email it out as an attachment or print it out. Or you simply post this to social media by clicking on Facebook. We’re about to add a Craigslist button. You can post this on LinkedIn, and you’re showing your buyers exactly and only the day that that they need to see in order to quickly make a decision. You look intelligent, you look like a rock star, you save your buyers time because now they probably don’t have to go out and look at this property before making a decision. This is going to get you more buyers. This is going to get your deal sold quicker and probably for more money. And we’ve got all of these push button deal marketing features right here at your fingertips. Share it to social media, click get unique link, and just email a link to this presentation to anybody that you want.

So now, let’s go through these numbers manually because I think it’s going to help you learn the math that we just talked about. Okay, I would highly recommend getting a calculator out for this next section. So, let’s recap. You’re going to sign the contract for the seller for $52,000, so you’re going to tack on a $5,000 assignment fee. Your cash buyer pays $57,000 for the deal. His total cost basis is 57,000, plus 3000 in closing and holding costs, and then $20,000 for renovations. So his total cost basis is $80,000. $80,000 is 80% of the after repair value, which is $100,000.

So your buyer’s sweat equity is $20,000, 20%. You know the saying, you make money when you buy, not when you sell? Well, that’s where the saying is very relevant. By the time your buyer is done with his rehab, or you if you’re doing this deal, you have $20 in equity on your balance sheet. Net operating income is $1,100 a month in rent, minus $400 in expenses, is $700 a month in NOI. If you multiply that by 12, that’s an annual NOI of $8,400 a year. Then you can calculate your cap rate based on your cost basis by taking that $8,400, dividing by 80,000, which is what was spent in the deal. Capitalization rate is 10 and a half percent. It’s pretty good. It’s a good return on your buyer’s money, and as the income goes up year after year, that affective cap rates should go up as well.

So, if there is no financing in this deal, then the $700 a month is the actual monthly cashflow. You can calculate the cash on cash by taking 700 times 12, divided by $80,000, 10 and a half percent. So, if there is no financing, your cap rate is going to equal your cash on cash return. But let’s assume for a second that your buyer gets financing and puts $20,000 down to do this deal. We’ll assume his mortgage payment is $450 a month, so you would calculate cashflow by then subtracting that $450 mortgage payment from the $700 net operating income. That leaves you with 250 a month in cashflow, or $3,000 a year in cashflow.

Your cash on cash return now is $3,000 divided by 20,000. Why 20,000? Because that’s what your buyer actually put down in cash into the deal. And you can do all this math using the software. It’s very simple, but I want you to learn how to do this on paper first with your calculator. But the software then will automate this for you and save you a ton of time. But you need to understand these basic concepts even without the software first. So the cash on cash return becomes 15% a year, and cash on cash now is higher than your cap rate because you’re involving leverage in the deal.

Instead of putting 80,000 of cash into the deal, it’s now only $20,000. Go through this again. You can pause, you can rewind this case study. Put this down on paper. Use your calculator. Learn these numbers. Learn these terms, because if you do, you’re going to be ahead of most people running around out there beating their heads against the wall, not knowing what they’re doing. If you’re wholesaling, you need to learn how your buyers look at these deals, and if you’re going to be doing these deals yourself. This is vital for you to understand how to get equity and cashflow, and how to calculate the return on your money.

All right, so learn this. Here’s what I want you to do next. Click share below this video please and share this on Facebook or Twitter, or anywhere else on social media. I know that you know other investors that can benefit from this. Leave me common below the video with any questions or thoughts. If you don’t have the free software yet, go to www.rehabvaluator.com and sign up for a free account. It’s incredibly powerful software. Nobody out there gives what we give away for free. It just doesn’t exist. And if you’re already a free account holder, but you haven’t upgraded to Rehab Valuator Premium yet, I would highly encourage you to do so asap because it’s going to give you the full marketing ability that I just showed you to market to blast out your deals to your buyers to sell your deals quicker for more and more money, and to build your buyers list as well.

There is additional marketing capabilities that I show you in other case studies that allow you to raise private money for your deals, blast out funding proposals to hard money lenders, even to banks, and you also get a ton of amazing bonuses when you upgrade as well. Nothing like the success. This software has been imitated and poorly copied by now out there, but nothing like this truly exists, especially for the value that we give you. So I highly encourage you to sign up if you haven’t signed up, and upgrade if you already have the free software. And again, share this, leave me comment, and I’ve got more awesome case studies with real actionable information and education coming your way. All right, that’s it. Thank you very much for watching.