Profit margins on a rental property

9 Replies

Hi all, I'm new here and new to the industry. I have been scouting out some properties in the Salt Lake City. Basically, my question is what is a good profit margin for a rental home? I have found houses that I can buy for 800/mo and rent for 1200/mo. Is this a good deal? Should I pursue this? I know about the whole 50% rule but I can't find anything that comes close to that. Any input is greatly appreciated!

Does 800 per month include insurance and taxes? I would tell you to be patient and keep looking at deals and running the numbers. I am buying homes for 300-400 monthly PITI and renting for $1100 - $1200 and I still don't feel like my margins are big enough after management, repairs, vacancies, city fees etc. But I am buying 100 year old homes in so-so neighborhoods. Be patient and analyze a lot of deals but in the end you gotta make some moves!

Yes $800 PITI. How do you find houses that cheap? Do you look for short sales and/or foreclosures? If people are willing to pay $1100 for the property you pay $400 for, why don't they just buy?

I find foreclosures and estates that pull in double the mortgage or more in rent, if you can't find, be patient. I waited and offered for 9 months on a house until they gave it to me for my price...

@Tyler Dunlap  now you just revealed one of the perils of asking questions about what to expect to pay for properties to a national audience.  Look at the locations of where the responses you received came from.  None of them are anywhere near Utah.  Have you ever heard the expression, "real estate is local?"  I'm here to tell you, it is extremely local.  To a lower level than zip codes in cities that have more than one zip code.  It usually is local down to the subdivision and sometimes street to street within subdivisions.

I think you also need to revisit the 50% rule.  It pertains to estimating operating costs and has no relation to value as your use of it implies.

There is no way to analyze your monthly payment vs rent equation to know if you have a good deal. You have to analyze the overall numbers of the deal to know whether or not its a good deal. If you are paying 800/month for five years or for 20 years makes a big difference. What is the FMV and condition of the property? What would another informed buyer be willing to pay for the property? Does it need any repairs and if so, how much? There's so much more to the equation, that you need to give consideration to that is beyond monthly payment vs rent to analyze a property's potential as an investment.

You might want to try something like this:

http://beta.biggerpockets.com/files/user/brandonatbp/file/brandon-turners-spreadsheet---rental-flip-hybrid-calculator

Localized markets will narrow down your search. Find out the best indicators and, with patience, you'll locate a properly cash flowing deal that will make sense. Don't feel rushed to jump onto a deal that shows signs of possible trouble later on.

tyler, if you need any assistance im located in your area, and im a local investor and realtor that specializes in helping investors.

@Tyler Dunlap  The actual profit numbers will, as stated above, vary by market. But before looking at that, you need to educate yourself thoroughly on what constitutes positive cash flow, what a good deal is, and what your target market is like. The "gold standard" is to buy a solid house, in a good neighborhood ,that rents for 2% of all in, rent ready price or better. That is hard to find in many areas right now, but there are places where it exists. But you also have to be careful because most markets have those properties, but in bad neighborhoods. Not where you want to own, as a new investor. 

@Tyler Dunlap  you should work with @Mike Gallagher  on this one. He is much closer to your local area and will likely be a wealth of information for you as far as local pricing and expenses.

The key to a good deal is to be able to figure our your NOI (net operating income) plus property management. This information can only come from talking to current landlords and investors in your area. Once you know what you can make on a property THEN you can decide what you should buy it at. not the other way around... A great book to read on this subject is, "the abc's of real estate investing" by Ken McElroy.

This process has helped me identify a bad deal much quicker so I can move onto finding the very rare Great Deals! They are out there, you just need to learn what they look like in your area!

Cheers!

Hi Tyler,

SLC does appear to be a unique market to invest in. After much thought, I've lowered my 50% rule to 40% expenses. 10% repairs,vacancy,management, taxes/misc. Also, forget trying to find something that meets the 2% rule haha. My current project hits 1%.

Still, patience is required here. I get wholesale deals every week or so that I pass up because everyone here goes by rent-piti=profit rules.

Keep looking, I found tons of deals that met $100/door and 50/40% rule a while ago. I've been too busy fixing an investment in Tooele to look recently though.

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