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You don't need to be a college calculus student to understand real estate math. In fact, most of the math you'll need is grade-school level. This section is going to quickly touch on some of the basic concepts and math formulas you'll need in your real estate investing career.


Income:


Income is simply the amount of money that comes in from a property. This math is perhaps the easiest of all: simply add up the amount of rent and any additional fees that comes in.

For example – you own a rental house. The home rents for $1000, and the tenant also pays $25 for the use of the garage.











Your total income was $1025.00.


Income could also include late fees, application fees, pet fees, laundry or other vending machines, or any other value you receive from your rental.


Expenses:


Expenses are simply the things that cost you money on an investment. For example, the garbage bill for a home is $50 per month, the loan from the bank was $500 per month, and maintenance was $100 per month. The total of these three expenses is $650.00.











Your total expenses for this example were $650 for this particular month. Keep in mind that there are many other expenses that you'll face as a real estate investor, including things like taxes, insurance, management, holding costs, capital expenses and various others.


Cash Flow:


Cash flow is simply the amount of money left over at the end of the month after all expenses are paid. To determine the cash flow, simply subtract the total expenses from the total income:











Your total cash flow in the above example property was $375.00 for the month. Let's look at a few more math equations.


Return on Investment:


Your “return on investment” (also known as ROI) is a fancy way of describing what interest rate you are making on your money per year. For example, if you invested $250 and you made $250 from that investment (for a total of $500) over the course of one year, you would have made a 100% return on investment. Similarly, if you invested $5000 and made an additionally $2500 over the course of a year (for a total of $7500) you would have made a 50% return on your investment.


The actual calculation for Return on Investment looks like this:


ROI = (V1 – V0) / (V0), (where V1 is the ending balance and V0 is the starting balance)


A simple scenario for using ROI to calculate an investment return would be as follows: On January 1, you put $1000 into a bank account. On the following January 1, you cash out the account for $1100. Your ROI on the investment is:


ROI = (1100 – 1000) / (1000) = .1 (or 10%)


You start with $1000 and end up with $1100 after a year for a return of 10%.


These simple concepts present the foundations upon which almost all other real estate calculations are based. The rest will come in time, but most calculations are simply related to these.


Tiffany Alexy didn’t intend to become a real estate investor when she bought her first rental property at age 21. Then a college senior in Raleigh, North Carolina, she planned to attend grad school locally and figured buying would be better than renting.


“I went on Craigslist and found a four-bedroom, four-bathroom condo that was set up student-housing style. I bought it, lived in one bedroom and rented out the other three,” Alexy says.


The setup covered all of her expenses and brought in an extra $100 per month in cash — far from chump change for a grad student, and enough that Alexy caught the real estate bug. Now age 27, she has five rentals and is a broker and owner of Alexy Realty Group in Raleigh.

Alexy entered the market using a strategy sometimes called house hacking, a term coined by BiggerPockets, an online resource for real estate investors. It essentially means you’re occupying your investment property, either by renting out rooms, as Alexy did, or by renting out units in a multi-unit building. David Meyer, vice president of growth and marketing at the site, says house hacking lets investors buy a property with up to four units and still qualify for a residential loan.


Of course, you can also buy and rent out an entire investment property. Find one with combined expenses lower than the amount you can charge in rent. And if you don’t want to be the person who shows up with a toolbelt to fix a leak — or even the person who calls that person — you’ll also need to pay a property manager.


“If you manage it yourself, you’ll learn a lot about the industry, and if you buy future properties you’ll go into it with more experience,” says Meyer.


This is HGTV come to life: You purchase an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV.

“There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do,” says Meyer.

His suggestion: Find an experienced partner. “Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project,” he says.

The other risk of flipping is that the longer you hold the property, the less money you make because you’re paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you don’t mind a little dust.

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