Ignoring the Rules of Thumb

7 Replies

I havent dove too deep into the 50% and the 2% rules of thumbs. Im going to make a purchase on a MF owner occupied investment property in the near future and since it'll be my first purchase, I plan to scrutinize every detail. My question: can I get by without using these down and dirty rules?

Yes, the rules of thumb are just to help see if a property is worth looking into in the first place and NOT how you'd actually determine if the investment is worthwhile.

If I waited until a property fit the 2% income per month rule, I'd still be looking.  That one is very area specific and isn't reality for most.  I don't go below 1% per month, though.  House hacking can be an awesome strategy!  Best wishes @Kevin Izquierdo !

The most important Rule of Thumb I learnt from a carpenter..."don't hit it with a hammer". Other than that, it is more important to learn what they DON'T tell you. Any rule of thumb should be personal, and based on your specific REI criteria, budget, and market.

To use anyone else's rules of thumb in my opinion is a fools errand.  Other people's rules of thumb don't tell you what you need to know..."does this deal work for you?".  What it does tell you is "does it work for the person that came up that particular rule of thumb".  Not very helpful...is it?

Originally posted by @Steve Vaughan :

If I waited until a property fit the 2% income per month rule, I'd still be looking.  That one is very area specific and isn't reality for most.  I don't go below 1% per month, though.  House hacking can be an awesome strategy!  Best wishes @Kevin Izquierdo !

 Amen, brother! I don't buy most of the 2% hawkers that run around here on BP. I'm not saying these deals can never be had, but it is unrealistic for the vast majority of the country, and I also believe that most of the people who claim these kinds of deals are puffing and purposely obfuscating or ignoring expenses outright to make such claims. Finally, 2%+ generally only works at a very, very low level of house investment - $50k or less. There are not too many places in the US that you can be all in on a house for less than $50k and collect more than a grand per month in rent. 

The BP forums are no different than any other group of forums I've frequented. There are good people, bad people, honest people, liars, dupes, cheats, newbies, pros, swindlers, etc. Most "rules" are written by people who either have something to gain by the rule - money, notoriety, information, whatever - or really don't have a firm grasp on the situation and thus are coming up with rules that make no sense for most people. 

PS: I have read a lot of investment books, listened to interviews and podcasts, and I have never heard of the "2% rule" before seeing it on BP. I have heard of the "1%" rule, which I have found genuinely works as a general guideline on whether a property might make sense, more than as a rule. Everything I own fits that rule, and my version of the rule is: Rent > 1% of: Purchase price + annual fixed costs (HOA, taxes, insurance)/100. That actually provides a rough return of 12-15% annually before maintenance, capital expenditures, vacancy, and any carrying costs (i.e. loan interest). Since I do nearly all repairs and rehab, have virtually no vacancy, and pay cash, I generally end up with about 12-15% return after tax benefits are factored into the equation.

@Kevin Izquierdo , by definition, the criterion you end up using will become YOUR Rules of Thumb! And so it SHOULD be personal!  

Also, don't apologize if you need to change any of your criteria along the way. Cheers...

Our strategy is to buy a dog & fine tune it to make it a very profitable enterprise.

Admittedly some are beyond hope but we recently took a 5-unit that had 3 vacancies for several years because of very poor PM. The seller then took a $60,000 loss on the sale to us as he accepted our lowball 'cash, close in 30' of $135K. After being transferred out of state, suffering an expensive divorce & the constant vacancies he was literally exhausted.

Within a year we have the rental income over $39,000 with expenses down to $13,000. We have a lot more room to reduce the current operating expenses & we are pursuing those.

So the 50%/2% were never a consideration....

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