Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
Let's assume I'm working in a vacuum, where there is no appreciation, no debt, stable rents, and the 50% rule applies. My goal is to be recapitalized on my initial acquisition + rehab in three years or less from the net rents received.
That would mean my equation would look like this for a property that makes sense to buy:
.91*[(R*36)/2] > (Acquisition + Rehab)
So, after doing some number crunching on some real life examples (assuming 9% property management fees and the 50% rule), it would appear that dividing the rent amount by .061 I can come up with my max purchase price.
If I could find properties that rent for $1000 and be all-in at $16.4K - well that's a no-brainer in most cases (war-zones would still be excluded). I suspect such properties will be rather difficult to find.
BTW - the PM is "built into" the 50% rule, so no need to make the adjustment with the 0.91 factor there.
The 50% rule include management fees, so get rid of the .91 factor. I think you're saying you want to pay cash, then get back all your cash in three years. So, the proper percentage is 5.55%. Another way to say that is you want a GRM (gross rent multiplier, purchase price / annual rent) of 1.5. Good luck finding that anywhere. I'll take a few, too, please.
If I could find properties that rent for $1000 and be all-in at $16.4K - well that's a no-brainer in most cases (war-zones would still be excluded). I suspect such properties will be rather difficult to find.
BTW - the PM is "built into" the 50% rule, so no need to make the adjustment with the 0.91 factor there.
Assuming the annual rent is subject to the 50% rule, the GRM for the one I bought today is 1.67... so not quite 1.5, but close. I'm also assuming that you meant purchase price + rehab, not just purchase price.
If it is gross rent (i.e, not subject to the 50% rule, which the name would imply) then the GRM is .83.
We used to be challenged getting 1% back in 05 - 07. The last three duplexes are ranging from 1.8 - 2.1% times have changed for the better.
I should add these are the same areas we have always bought in.
Even 2% is a 8 1/2 year payback assuming 100% financing though... to fully pay cash and except payback in 3 year is nuts, that's the 5.6% "rule"... holy cannoli. Looking for a 33% Cash on Cash unleveraged return? Most are happy with 20% leveraged which is still a 5 year payback...
There are several posters on here that like to really crunch numbers. They use all kinds of formulas, get all kinds of return figures, and end up with a plethora of numbers.
But as we all know, at the end of the day, they are just numbers. If I get 1% of the purchase price in rent, it will take 100 months to get my purchase price back and using the 50% rule, it will take me 200 months to get my purchase price back. The 50% rule does NOT take into consideration appreciation and depreciation, which definitley affects the return.
Like Jon said, if you can find any investment that fully returns my initial investment in 3 years, I will take a few.
For me, any real estate investment that returns my initial investment to me in 10 years AND has a strong chance of doubling in value in those 10 years, I will take that all day long. This would equal out to a 1.67% of the purchase price in gross rent. Unfortunately, I have never gotten that as I purchase properties that rent well north of $1,000 a month and approach $2,000 a month. I just can't seem to find an SFR for sale for $120,000, and that would rent for $2,000 a month. Some duplexes might, but I hate multi family purchases.
I still like the 1% rule for me personally. If I pay $150,000 for a house that rents for $1,500 a month, I am satisfied. No, not a home run, probably just a bunt single, but still a single. Buying newer homes in nicer neighborhoods gives a much stronger chance for strong appreciation. Also, by doing this, I greatly reduce the 50% rule. In 2011, owning 30 properties across six states, I changed my "50% rule" to my "37% rule."
Jake, I would be careful with this logic. In many cases if an an asset is selling for that price there are probably some factors that will cause your expenses to be greater than 50%.
Complete war zone, extreme distress, no existent rental market, low price point.
I am not saying your scenario doesn't exist. If you've found a niche that can generate these returns consistently in volume I think you have to ask yourself if there is a reason why other investors are not pursuing it.
Some reasons that would keep me away: impossible to manage effectively, impossible to keep occupied, no consistent rental demand (or tiny rental market).
A friend of mine used to own 3 or 4 houses around UCR and rental them out to students. Market rent was 1,400 to a regular person and he'd get 2,000 - 2,200 rent this way. After a lawsuit, a couple seasons he missed finding students, he now happily takes 1,400 instead.
At 1% if you are financing < 15 years with no property management and vacancy of 3%, its a looser at best it brakes even otherwise it is subsidizing someone to live there. Around here anyway
Ryan
I do not know the Michigan market place, but there is no way you can buy anything in Southern California for $900,000 and get $15,000 a month rent. If you paid $900,000 for an SFR, you might get $3,000, MAYBE $4,000 a month. If you bought a 2-4 set of units, you might get $6,000 a month. I recently sold a commercial property for $700,000 that I was getting $8,000 a month, single net. LoopNet shows most So Cal multi units selling for around 100 times the gross monthly rent.
I know that other markets have vastly different numbers, but people have to invest where they know the market.
Mike - It is intresting how high the CA market is. I have family in San Bernardino area and they are active in commercial buildings, everytime I talk to them about the properties they find it makes me shutter at the prices.