BiggerPockets

Total newbie here, considering buying a property to rent (two family home) and hold for 5-10 years before selling.

I'd like to have a break even or positive cash flow and was wondering if there was a rule of thumb of what ratio of home cost (sale price) / (annual rent) would be a good place to start?

Thanks

Hmm, I wonder if these #'s need to be adjusted in different markets. I'm on Long Island (NY) and the absolute cheapest houses are 300K, I'm looking at a property 350K, that can rent for about 3200 a month. Does that sound like a horrible investment?

If a place costs $350K and rents for $3200/month, you could certainly buy it and rent it. P&I on a 100% note would be $2328/month. NOI after 50% expenses will be $1600. That puts you in the hole by $728/month.

Even with a more optimistic assumption of expenses being 40% of rent, you're still in the hole $408/month.

If you pay cash, and using the optimistic 40% for expenses, you get $1920/month in cash flow. That's a 6.6% return on your cash. Slightly better than CDs, but not much.

Does this investment make sense..

Purchase price of 3 family home: $70,000
Taxes: $2000 per year
Gross Rental Income: $1500

Landlord pays water, insurance and taxes only. Tenants pay utilities.

What do you guys think ?

Jon,

What an easy and straightforward answer. I think this should be kept at the top of the starting out page (sticky?) and labeled "The Basics."

Clearly there are a large number of real estate investors out there paying way to much for their investment real estate. Most don't take into account their own money - that includes the agents selling the properties. The goal is to keep hunting and find those gems that you can add value (equity) too. Then bring the 50% rule into affect. Let the losers buy the losers and you will be laughing all the way to the bank.

I've made a couple of threads in the Landlording forum on this topic sticky. Have a look at those for more than you ever wanted to know about expenses.

Really, expenses are the only tricky piece of evaluating a rental. Everything else is just simple math.

A property that has a monthly gross rental income of $3200 will not have expenses reaching anywhere close to 50% in most cases. For properties with $400-$700, I am sure they do. Percentages can change dramatically depending on the gross rent.

I disagree. First, this is a duplex, so the rent is only $1,600 per unit per month. While this COULD have a middle class tenant in it, it could also have a bunch of lower class tenants sharing the rent. A $1,600 per month rental would be unheard of here in Ohio, but $1,600 for rent certainly isn't upper class on Long Island or NYC - not even close.

Will is correct that IF you had a well-screened middle class tenant, that the eviction rate and tenant damage could be lower. However, the property taxes are sky-high on Long Island (one of the highest in the nation) as are all the other taxes. In addition, socialist bastions usually have some of the most unfavorable eviction laws in the country. So, while you may not have as many evictions, the cost of the eviction and the time it will take will be much greater. The point being that it all averages out and the 50% rule is still the most accurate gauge going.

That is not to say that a person shouldn't do all possible due diligence. While expenses are almost never much below the 45% to 50% range over time, they could be higher on an individual basis. You might also find that the government issues are so onerous that it isn't worth holding rentals on Long Island even if you could find a property that would cash flow. Even here in Ohio, dealing with the government stupidity is very frustrating and can be more aggravating than dealing with tenants because it's harder to fight.

Paying 10% for PM on this type of property would be ridiculous and probably self manageable, even from a distance, so that fee can be erased.

What? I thought you said that property managers MADE you money? Just kidding - I'm glad to see that you're converting to the self-manage school of thought! One little point though, even if you manage, you still can't "erase" the management expense - not unless you work for free (I don't). As I've said many times, property management is the most over-paid job on the planet! You certainly don't want to give that away!

Mike

I do not know the other area . But in PA North Wales, $280,000 with home association fee $135 can only rent $1750 per month. A lot houses rents out like this.

A 350K house on Long Island may very well have $1600 per month in expenses when you factor in the high taxes, cost of insurance, maintenance, etc. Especially in Nassau County, 350K does not buy you a great house. It's likely to need repairs and considerable ongoing maintenance, all of which will add up.
For these reasons, as Jon mentioned earlier, often the only way to make money there is through appreciation. Even then you have to hope that the appreciation covers the negative monthly cashflow in the end.