This writeup is broken into two parts: the present day cash flow and long term performance.
At the top of the cash flow calculator is Monthly Rent, which you can edit directly. At the bottom is Cash Flow.
Between Monthly Rent and Cash Flow are Monthly Costs:
- Property Management
- Maintenance Budget
- Vacancy Budget
- HOA Dues (when applicable)
- Loan Payment
= Monthly Cash Flow
You can edit Monthly Costs by changing their dollar amount or by changing the formula that calculates their dollar amount. You can edit Loan Payment on the Financing Card below the Cash Flow Card.
| ARV - Profit - Acquisition Costs - Rehab Costs - Carrying Costs - Selling Costs = Purchase Price
The Taxes are based on the latest county data we have, pro-rated monthly. The default monthly Utilities formula is $0.03 per square foot. $0.03 / sqft . The default monthly Insurance formula is 0.25% of the ARV
Good rental investments do not always include positive cash flow out of the gate or even ever. This is because appreciation and other factors affect the attractiveness of a rental property investment.
This does not mean cash flow or rental do not income matter. Rather, that areas with greater appreciation and value endurance are likely to have lower present day cash flows.
In addition to cash flow, Pellego calculates a "relative cap rate" to evaluate rental performance compared to local averages. Specifically:
Relative Cap Rate = Property Cap Rate / Average Zip Code Cap Rate
A relative cap rate of 1.3x means the purchase cap rate is 30% greater than the zip code average.
It is important to note that Pellego calculates cap rate in two different ways. The average cap rate is calculated with the average rent per square foot and the average value per square foot. The subject property cap rate is calculated based on the sum of purchase price and rehab, since the true cost of purchase includes any costs required to get the property rent-ready.
Cap Rate = Net Operating Income / Present Value
Net Operating Income = Annual Rent - Maintenance - Vacancy - Management
Present Value = Purchase Price + Rehab Budget
You can choose between two default rental strategies: Hold and BRRR.
Hold (Buy-and-Hold) is the strategy of purchasing a property that is move-in or mostly move-in ready condition. In contrast, the BRRR (Buy, Rehab, Refinance, and Rent) is the strategy of purchasing a property that requires a medium to heavy rehab, and using the now higher value of the property, refinancing some or all of cash tied up in the deal.
When you switch the strategy from Hold (the default) to BRRR, Pellego updates the monthly rent with a higher estimate, and the reverse when you switch back to Hold. Note: this will overwrite your rent estimate if you typed one in.
When you switch strategies, Pellego will also updating the mortgage financing (next section).
Pellego currently offers two types of rental financing options, based on the selected strategy.
The Hold strategy uses an amortized mortgage based on the purchase price. By default, Pellego uses a 30-year mortgage with 20% down, a 1% origination fee, an interest rate of approximately 0.5% the existing homeowner rate.
The BRRR strategy uses a refinance mortgage based on the after repair value ("ARV"). By default, Pellego uses a 30-year mortgage of 75% of the ARV, with the same origination fee and interest rate listed above.
With either mortgage, you can edit the percentages by typing in a new number, and you can switch between a 30 and 15-year mortgage. Editing mortgage terms will update the mortgage payment cash flow cost and will affect your long term rental projections detailed below.
Pellego's rental projections are based on the cash flow above and on your Long Term Assumptions: the average rate of value appreciation, the expected total holding period, the average rate of rent appreciation, and the frequency of rent increases.
The Cash Flow graph displays the expected monthly cash flow over the holding period. You can hover your cursor over the graph to see what the expected cash flow for a given month, the cumulative cash flow profits to date, and the average yearly cash flow ROI to date.
Cash flow changes over time based on two assumptions: the rent schedule and the length of the mortgage.
The rent schedule creates a staircase effect on the cash flow graph. The more frequently rents are raised, the smaller the stairs get on the graph, and the more cumulative cash flow one makes (all else being equal).
The length of the mortgage affects cash flow if the holding period is greater than the loan period. You can see this reflected on the graph with a sudden drop in mortgage costs and corresponding increase in cash flow profits.
The Net Equity graph displays the expected profit from reselling the property at any given time (after Selling Costs), along with the expected capital gains ROI for that point.
You can edit selling costs on the Flip Tab and you can edit the rehab costs on the Rehab Tab. If you use the BRRR rental strategy, Pellego will calculate net equity as the flip profit from the flip tab.
Unlike the cash flow graph where variables change periodically, net equity changes continuously with monthly principal pay down and compound average value appreciation.
The Total Profit graph combines the cash flow and net equity graphs into one.
When you hover over a point on the total profit graph, Pellego displays the cumulative cash flow and the resale profit as of that point.
Negative cash flow or resale profit is displayed below the x-axis and positive cash flow and resale profit is displayed above.