What rule of thumb do you use? If you use one

Question

Hey BiggerPockets Community,I have not posted on here much. Mostly because I am still in the educating myself with reading and the podcasts. I did not have a question, until now! (Well two) Do anyone go by a rule of thumb before going further into analyzing a property? The 50% rule or the 1% or 2% test? I have been using the 50% rule (Cash Flow = (Total Income * .5) - Mortgage P&I). I have been trying it a few properties just to get myself "in the game." Some of the properties that I do the 50% rule on come up with very little or negative cash flow. Should I dig deeper and figure out all the numbers and forget the 50% rule?

Also, how do I get more involved with BP and hang out? Especially if I do not have any questions or advice to give at the moment? I know on the podcasts they always say get on and hang out.

Nathan Gesner · Answer

@Joe Villeneuve he specifically asked if you use a rule of thumb before critically analyzing the property. I don't know anyone that starts a detailed analysis the first time they see a property. The "rule of thumb" assessments are a means of filtering out deals we know won't cash flow, like a $400,000 house with tenants on a 2-year lease for $1,600 a month.

@Daniel Basaldua I personally try to get as close to 1% as possible because anything that beats a 1% return is doing well in my market. A SFR for $240,000 only rents for $1,400. A fourplex sells for $300,000 but brings in $2,500. I have to do better than that to make the deal worth my time.

I start with the 1% rule because it's very simple. If the property can rent for 1% of the purchase price - or better - then I will investigate and plug real numbers into a calculator to see where it really comes out.

I have used the 50% rule but I don't live or die by it based on my personal situation. I know others that do and it works very well for them. I recommend you analyze deals using multiple methods until you find what works for you.

Joe Villeneuve · Answer

Use your own criteria to narrow down that list. You should be analyzing using reverse engineering, from your financial goals (setting your property profiles) to find micro-markets where these properties exist in quantity. Then camp out there. Don't chase properties...find markets. When you analyze a market, based on your criteria, you just analyzed every property in that market...by default.

Daniel Basaldua · Answer

@John Parshall @Jordan Decuir @Joe Villeneuve

Thank you for the responses. I was doing it to narrow down properties. But I will just become better at analyzing properties that match my criteria.

Joe Villeneuve · Answer

No, none, never.

Rules of thumb, like the ones you mentioned, are based on "generalities". REI is far from a generality. REI is very specific, and the choices you make should be based on your "specific needs"...not some general arbitrary guess. If you want to do it that way, use a dart board. If you hit the board 50% of the time, then buy the property.

Analysis, specific analysis, is crucial. Don't waste your time guessing. It will result in one of three things:

1 - You eliminate a good deal.

2 - You chase a bad deal.

3 - You get lucky and you are directed in the right direction.

Learn how to actually analyze markets. Markets, and finding the micro-markets in those markets, that are filled with properties that match your "specific financial criteria of need", is critical to your success...and, to maximizing the use of the one thing you have a limit on (and shelf life)...your time. You can always get your money back, but when you spend your time...it's gone forever. Don't waste it guessing.

What rule of thumb do you use? If you use one

What rule of thumb do you use? If you use one

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