Massapequa Park, NY · Member since 2008 · 15 posts · 1 vote
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?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
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.
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
17y
Mike and others, what is the best rent to price ratio you've had? I have an offer in on a duplex that should gross 3% of purchase price each month. I've seen some war zone section 8's that would do a lot more, but....
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y
Jon,
I believe my best to date is 7.6%.
If anyone has a question about the accuracy of statements by Will or me, I suggest reading this thread (or any of the other threads from 5 months ago):
http://www.biggerpockets.com/forums/12/topics/19967-can-someone-please-explain-this-5-rule-to-me-?highlight=50%%20rule.
...and yet you can't provide one single post or specific reference where anyone discussed the 50% Rule before my book. With something you claim is so common, you would think it would have been discussed at least once before I came to BiggerPockets. Once again, you're making claims that you simply can't back up with facts, which is why I frequently question the things you post. It isn't personal. If you would post accurate information, I wouldn't question it.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
Originally posted by MikeOH:
...and yet you can't provide one single post or specific reference where anyone discussed the 50% Rule before my book. With something you claim is so common, you would think it would have been discussed at least once before I came to BiggerPockets.
I just gave you three or 4 people who have used and taught it long before you. Does it need to be in print for it to have been used? Your demand for research of a printed sample is ridiculous and pointless. Again, I don't care if you want to think you are the author of it. It is of little importance to me, but obviously a soft spot with you.
[quote-MikeOH]Once again, you're making claims that you simply can't back up with facts, which is why I frequently question the things you post. It isn't personal. If you would post accurate information, I wouldn't question it.Please explain to all of us how my examples of people using the 50% rule long before you is inaccurate? I gave you several. Are you calling these people liars? Are you calling me one? I just explained to you that I personally know of at least three individuals who have used this type of rule. If you need to see in in print, why don't you contact these people yourself and do your own research if it means that much to you.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y
I'll take that as a 'No', you can't find a single written reference.
How about explaining how that $438,000 4-plex on your website with rents of $4,380 cash flows (has Great Cash Flow)? If you're not using the 50% rule, what do you claim the expenses are?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
I knew I had seen this somewhere. Here's a reference:
p124, Steve Berges, “The Complete Guide to Buying and Selling Apartment Buildingsâ€, published December 20, 2004 by Wiley.
Dave Lindahl also mentions this as a rule of thumb. I've heard him say this value, but don't recall the first time. On pages 116 and 117 in his newest book, "Multi-Family Millions: How Anyone Can Reposition Apartments for Big Profits", he walks through an example and points out that if expenses are below 50%, the seller is either deferring maintenance, not really aware of his true expenses, or lying.
Both of these books do deal with apartment buildings, though.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
Originally posted by MikeOH:
I'll take that as a 'No', you can't find a single written reference.
Take it however you want, you do anyway. Not sure who sets the rules that state you have to have a written reference. Do your own homework.
[quoteJon Holdman]Sorry, Mike. No need to be sorry Jon. Evidence is evidence. Thanks for the "written references" and the time.
Looks like you are not the author as I stated CORRECTLY Mike. Again, I had no need to prove it to you, but you seem to continue to press the issue, so now you have it.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y
No need to be sorry. Everyone that has a significant number of rentals should know that the operating expenses are about 50%. It is not a secret and has been published in the apartment association studies for years.
What makes the 50% Rule unique is what's included in the expenses - specifically including vacancies and capital expenses (which are not usually counted as operating expenses) and the specific range that I use (45% to 50% of gross rents). Furthermore, I would disagree with Berges that the operating expenses average 40% and 60%, and would argue that the data doesn't support that. All the data I've seen say that the operating expenses run 45% to 50%, including Taz's data. If the data really said that the operating expenses were 40% to 60%, then I would have called my rule the 60% rule, because I wouldn't want to tell new landlords 50% if they were indeed 60%.
As for a claim that someone is lying; deferring maintenance; or not aware of the true expenses if the expenses are below 50%, I don't agree with that either and that is not what the 50% rule says. The 50% Rule says that throughout the United States, operating expenses run 45% to 50% of the gross rents. So, if a landlord claimed that the expenses were in the 45% to 50% range (below 50%), I would say that is correct. Neither of these fit the definition of the 50% Rule, although I agree that both of these guys are at least in the ballpark, which is miles ahead of the vast majority of investors and gurus.
So, back to my question for Will. Can he explain how a $438,000 4-plex, with gross rents of $4,380 has "Great" cash flow? I'd really like to hear that!