What are your buy and hold investment rules?

24 Replies

Hi All,

I want to know what your investment rules are for buy and hold investments, specifically SFRs.  I know about the 1% rule, 2% rule, the 50% rule etc...that's not what I'm asking about.  I'm trying to figure out what you use to be and stay successful in investing, so I can apply what fits to my investment strategy.

I want to know what your goals are for cash on cash return, cashflow per unit, ROI, or whatever you use to screen deals. Why do you use this rule? And how can other variables effect your decisions? Things like interest rate, purchase price, LTV, potential appreciation, property type.

Thanks in advance.  I hope this drums up some good discussion!

  • 20% CoCr MINIMUM
  • $150/unit (highly dependent on financing though) May trade lower cash flow for shorter term loan.
  • In my target Market
  • Acceptable Property Taxes (some areas of town in my area have higher property taxes than others for some reason).
  • Lately I've been considering the ease of getting the property operational. Meaning I may choose a place that is rented/rent ready over a property with a $15k rehab even if the rehab might be a slightly better deal. There's less room for error and it generally requires tying up less funds in one project.

This is by far not everything, just some stuff I've been considering lately in my overall analysis.

I look for the following:

  • In one of my 4 target zip codes (I like to stay local within 5 miles of where I live)
  • Good neighborhood -- I want to be able to be there at 11pm by myself and feel okay
  • House needs to have good attributes -- no really funky layouts, I like houses with garages, no fireplaces
  • I prefer houses built in the 50s or newer
  • I want to buy for as little as possible, so I'm okay with a bunch of rehab if it means that I can get the property cheap -- anything I replace means its new so it will take longer to break
  • No foundation issues

I'm in Dallas, which I suspect is similar to Houston in terms of SFR buy and hold. Here are some of my buying criteria (I've got others but these are just off the top of my head)

(1) Sub-1500 square feet (those bigger houses,  which are very, very common can eat your lunch on maintenance).  My ideal house is a 1200-1300 square foot brick 3/2/2 in a decent area.

(2) Sub $130K ARV (much higher and rents start to taper off relative to value)

(3) Newer houses are superior to old ones (and will justify a higher price) as long as there is not a lot building going on nearby that will suppress home prices

(4) The result when I'm done fixing the home is that it has to be fully renovated and updated (no deferred maintenance or cap ex for the next five years)

(5) I assume 1 month vacancy per month.  My experience is that this is pretty conservative.

I would caution you about wedding yourself to the 2% rule or rules that demand exceptionally high CoC returns, like those you see in the midwest. Our property taxes are very high and the values relative to rents are much higher. (The only places in my area where I know you can achieve the 2% rule consistently are in very rough areas).

@Mehran K.  --I like your rules...guessing you meant 1 month per year vacancy.  Thanks for the advice on the 2%.  I only mention it to avoid having this thread turn into a debate over whether it is good or bad, when that info can be found with a search.  I personally don't think it's right for me.

Originally posted by @Scott Wessels:
Sounds like you are in a market with good price to rent ratios and you're able to buy low.  What kind of cutoffs do you use to make sure you're buying low enough?  That's might be in your interview too...I'll be listening to your BP podcast!  

 You may want to consider adding a picture to your profile, FYI.  :)

To answer your question, I try to stay around 2.5% rent versus purchase+rehab.  For example if I know I can get $875/month in rent, I want to be at $35,000 all in.  I don't always hit that but that's where I want to be.

@Scott Wessels   Thank you for your post. I also need to know but never think of asking.

@John Chapman I really like your 5 criteria. Do you also use a rent-ARV ratio (I assume more than 1%) and/or a minimum cashflow per SFR? Thank you.

@Scott Wessels  

15% Cash on Cash Return
$100/door/month profit
No Foundation Issues
No Engineering Issues
3 or 4 family (New England taxes generally make SFHs and Duplexes pointless)
In my target zip code 05701
Separated Utilities except sewer and water (too rare to bother)

I rarely see a 3-4 family place that doesn't meet the 2% rule.  I'm one of the few buyers in that zip code, so listed price is largely irrelevant to me.  So many of the places I'm looking at need rehab that I'll wait months for a price to come down.  As I mentioned, the taxes are extremely high, so holding costs for empty properties wears home owners down quickly.

*class A neighborhood

*min 3/2/2 with at least 1600sqft

*at least $200 profit margin

* no older than 8 -10 years unless already new systems

*high turnover rent market

*prefer 15% return based on amount invested

*highly lever

*forecasted appreciating market so it stay above inflation 

What numbers do you use in your cash on cash return?

@Mehran K.   $150/unit/month => $1800/year. At 20% CoCr your out-of-pocket is $9000. Is your loan down payment very low and minimum repair?

@Aaron Montague   $100/door/month => $1200/year. At 15% CoCr your out-of-pocket is $8000. Again, is your loan down payment very low and minimum?

@Elizabeth C.  $200/month => 2400/year. 15% cocr => 16,000 out-of-pocket. This is more understandable for me.

Here is what I consider my target property and then some of the variables that I'll move off.

1) 3bdrm, 2bath, 1,500 sq ft with a garage.

2) Purchase plus rehab at 70% LTV or better.

3) Gross rental profit of $400 a month (i.e. Rent minus PITI = mortg+taxes+insurance)

4) Built in the 70's or earlier.

5) Good schools. Schools drive renter stability, rents and actual pricing.

6) Things I TRY to avoid: Well/septic, Slabs, foundation problems in general, Rehabs over 20k).  

My variables:
1) 4 bedrooms are even better. Can do 3 and an office. Or 4.
2) I will go down to 1300 or up to 2,000 on the square footage. Bigger is always better to me. Big jump in rent going from 1500 to 2,000 sq ft. And 65% LTV is easier to hit. Great space is just much easier to keep people long term.
3) I won't go under 1,300 sq ft though. I just don't think those houses show well. Very few people want to be cramped.
4) Won't go less than 1.5 bath unless the house is in a great area and even then its questionable. People just want that second bathroom - even if only a half bath for the 2nd.

5) Garage isn't as important as the square footage and I have a couple of houses with no garages. I do figure a $50 deduction for no garage and I know it won't rent as easy. But still some real value. I typically cost in my head what its going to cost to add the garage in the future and see if that makes sense.
6) Gross rent of $400 a month. This is really the number I think people should use when talking about profit or not. The whole 2% thing or trying to compare net profits with other people is impossible. Everybody has their own cap ex rules and their own maintenance, etc. You're not comparing apples to apples when you speak in terms of net profit.

So I use gross profit. I know that if my gross profit on a house is $400 a month, I'm going to be happy. I know that number is also not as easy to hit as you think given that I'm buying my deals at no money down. So that would be the other factor in setting that. What would your gross profit be if you were financing the entire purchase and rehab???

That number would tell you whether you had a deal or not. That being said, i'll budge off that number too. If the house is newer (say 2000?) or bigger (say 2,000 sq ft), or if it was in a much more convenient area for me (like the town I live in), I'm more than willing to take, say, $350 a month in gross profit. But then I still need to hit my LTV number so I'm getting the house with little to no money down.

At the end of the day, I figure if I'm getting all in on a house for 5k to 7k and its making me $400 to 500 a month in gross profit, I'm doing pretty good.

At some point, your net profit becomes enough to feed those out of pocket costs so you're technically adding properties to your portfolio for nothing out of your own pocket. Its all coming out of your portfolio's profits.

Thats when the business is truly self sufficient and when you're really in the sweet spot.

@Mike H.   Can you please explain how you are all-in for 5k-7k per house? Are you buying cash, then do delay finance/cashout finance? Thank you.

Originally posted by @John Truong :

What numbers do you use in your cash on cash return?

@Mehran K.   $150/unit/month => $1800/year. At 20% CoCr your out-of-pocket is $9000. Is your loan down payment very low and minimum repair?

@Aaron Montague  $100/door/month => $1200/year. At 15% CoCr your out-of-pocket is $8000. Again, is your loan down payment very low and minimum?

@Elizabeth C.  $200/month => 2400/year. 15% cocr => 16,000 out-of-pocket. This is more understandable for me.

I'm almost always looking at 3-4 unit properties, so triple or quadruple your numbers.  But no, my down payments are generally 25% using conventional financing.  Repairs are rolled into my loan for the most part.

Bear in mind those are my minimum numbers.  I do quite a bit better than $100/door/month on all 7 of my doors :)  I use both numbers to make sure I don't delude myself into thinking I'm getting a great deal.  Some properties are not worth owning even if they are free.

@John T. 

Sure. I buy all my houses using hard money. To me, this is the only way I know of to truly grow your portfolio without having a ton of capital - which I don't.

But I do have HML's that will lend 100% of the purchase plus the rehab as long as the ARV is under 70%. The only thing I have to do is come out of pocket for closing costs and their points/fees (4%). Obviously, this limits the number of house I can buy as finding deals at this discount is not easy. But its doable. I've got 30 houses (closing on 31 and 32 this month) that I've been able to buy with this same model.

LTVs right now are all well under 70% - because they had to be. And my average gross profit per house is right at 406 per month. I'm technically HIGHLY leveraged when you think of what I have into my deals. But when you look at my equity ratios (under 65% total), they're actually better than quite a few people since they are getting in all at 75% LTV numbers.

My typical deals are where I'm all in between 85k and 100k. So I'm paying 4k or so in points and fees plus another 1,500 or so in closing costs. But I'm getting back the tax credit to help offset some of that as well.  I still figure that tax credit as an expense and count it towards my 5 to 7k. And lets not forget that there some houses end up going over the rehab budget. So thats where I'm coming up with my 5 to 7k number out of pocket per house.  Lately, its been a little better. but still, thats the norm for me.

Once I rehab and rent, I then refi into a commercial loan with a local bank (5 yr balloon,20 to 25 yr amort, etc).

Here are the actual numbers off the hud statements on my last 2 deals (closed in July and Sept) and the one I'm closing on this monday.

1) Oct 20 closing on bradley house
Purchase - 63,829
Rehab escrow - 18,965
My earnest money - 1,000
I need to come to the table with - $734
I'm all in at 1,734. with an existing rehab loan of $82,795
Appraisal value - 137k
My PITI when I refi should be: 850/mo. Rent of 1250 to 1275 month.
Gross profit of $425/mo.

2) Sept Braidwood:
Purchase - 47,872
Rehab escrow - 29,680
My earnest money - $1,000
I came to table - $2,003
I am all in at 3,003 and have an existing loan of 77,500.
Appraisal value - 127k.  
My PITI when I refi should be: 850/mo. Rent 1275 to 1325.
Gross profit: 425/mo to 475/mo

3) July Braidwood house (anndon lane)
Purchase: 103,754
Rehab escrow - 17,000
My earnest money - $2,970
I came to table - $5,322
I'm all in at - $8,300 and had an existing loan of $119,000
I then refi'd at 125k and pulled a couple grand extra so my all in is really about 5,300 on this one.
House appraised out at 200k. (I don't normally do houses in this range but this
deal was too good not to take down)
My PITI is 1168. Rent is 1650/mo. 
Gross profit is 482 a month and my principal paydown is 320 a month.

I usually won't buy any 2 bedroom units. 3 or more bedrooms. 2 baths preferred. Prefer newer units but just purchased one built in 1988. CBS preferred. I have been paying cash rather than financing. If the right deal comes along I will vary from these parameters. I always have a plan B if I cannot find a tenant. I have been buying strictly SFR for annual leases. I am starting to look at multifamily but have not purchased any. I prefer properties I can drive to within an hour. I don't have a PM. These are my general guidelines only. There are always better ways of doing things and there are many different investing strategies. There is no "ONE" way that is right...but there are definitely better strategies depending upon ones goals, experience, financial backing, etc.

Originally posted by @Scott Wessels :

@Mehran Kamari --Thanks! I'm listening to you podcast episodes to learn more about how you invest out of state. I'm looking at similar options given how Houston has blown up. Maybe you cover this in your interview, but how do you get 20% CoC while investing out of state?

Well Scott, if you're buying in a solid cash flow market, you should be able to hit 20% CoCr using leverage (financing). It's difficult to do this in CA, that's why I invest elsewhere :)

Originally posted by @John Truong  does bring up an excellent point about things being new once replaced though, it's a peace of mind I some times take for granted.

@Scott Wessels  

Cash flow

Minimal amount of crimes reported in the neighborhood

Cash flow

No sex offenders living in the neighborhood

Cash flow

Property isn't run down, so it can attract good tenants

Cash flow

Cash flow = $100 per door after 10% PM, 10% maintenace, 10% vacancy, $50 per month CAPEX, and HOA.

Could care less about appreciation or all the other numbers that justify the investment. 

Did I mention cash flow?

Coc of 5% higher than the REIT O is yielding at the time.
$500 per door minimum w/o capex
Newer home generally 1990 or newer
3 bedroom places must have a garage
Rents at the mid-high end of the market

Wow @Mike H. !!!  Thank you very much for sharing your strategy and for the detailed explanations.

Rule 1: Make >10% CoC {factoring in opportunity costs} and *Never* loose money!

Rule 2: See Rule 1.

Originally posted by @Jesse B. :

Coc of 5% higher than the REIT O is yielding at the time.
$500 per door minimum w/o capex
Newer home generally 1990 or newer
3 bedroom places must have a garage
Rents at the mid-high end of the market

Hi Jesse, that's an interesting point about comparing to REIT O yield. How do you define this number?

O's ROC tends to never go above 4% and spends most of its time in the +1/-1% range with some dips even lower. The gross dividend yield at the moment is also about 5% (rough calc of announced Nov divdnd vs current stock price).

Thanks!

-Dmitri

Welcome to BP. 

I don't buy condos, manufactured homes, villas, town homes and rarely buy 2 beds. I prefer 3 bedrooms, 2 baths when I invest in residential real estate. 

When I consider to purchase multifamily property, I always go for either 2 bedrooms or more because 1 bedroom apartment (in my area) has a very high turnover. 

Like many others, I prefer a minimum of $100 per door, at least 8% cap rate. 

That is just a snapshot. 

Hope it helps.

Welcome,

I'm really digging this forumn post.  I'm still a relative newbie, but I look for a few things:

1) > 15% CoCR with financing at ~25% down and property management

2) No foundation or sewer issues

3) No warzones, but do go into C- neighborhoods

4) $100-$200/door

5) Focus on multi-family (1-4 units)

6) Concentrate in 3 area codes in St. Louis.  Buildings tend to be > 90 years old, so I will almost always have issues (e.g., roof, tuck pointing, etc.).  Given this, I don't want my rehab to be > $20k

7) I don't quite know what the ARV is for this area as most properties are considered "investment grade", but I am confident that I am finding "deals". I decided to jump in and take advantage of these properties meeting the 2% rule before rehab costs.

8) Soaking up ideas from the post and others, and will incorporate as I grow! 

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