Attn Bper: Bens $1000 a month rule - learn it, love it, leave it?
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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votesOriginally posted by @Matt R.:
Originally posted by @Dawn Anastasi:
I do not agree with it. Only one of my single family homes makes over $1,000 in gross rent each and I still make money on them.
Dawn you are savvy enough to be one of the exceptions. Would you think this is generally a good rule for newbies starting out?
Generally, anyone new at anything is going to make more mistakes than someone more experienced. However, newbies to real estate on Bigger Pockets have access to thousands of more experienced investors to help them with deal analysis and any questions they may have. So it's like having thousands of mentors at your fingertips. Plus, there are many people who are willing to work with someone locally just by having that person offer to buy them lunch or coffee.
Without having the internet, and sites like this, newbies didn't have as much of a support system. So now, someone could take on a project like this. It's just important to know your own limitations.
126 Replies
- Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes11y
The Construction Cost Index in my region has been remarkably stable, at right around 3% plus/minus a couple tenths, for decades.
So I am going to say with a fair bit of confidence that the $5000 roof will cost just over $9000 in 20 years.
My sense is that Ben is extremely knowledgeable with many subjects. However he also makes very polarizing opinions on subjects he has no first hand experience with. My perception from his posts and personal website is that Ben only invested in large multi-families and apartment complexes.
There are lots of people who time and time again prove Ben wrong by saying they have been doing exactly what he is preaching not to do for 20+ years and have been very successful at it.
My only point is this. I am no expert at REI and am actually new at it. BUT Ben has a very narrow niche that he focuses on for his investments. That does not mean that there is only one way to make money in this business, or that every person who invests in other ways is a fool.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes11y
Originally posted by @Richard C.:
The Construction Cost Index in my region has been remarkably stable, at right around 3% plus/minus a couple tenths, for decades.
So I am going to say with a fair bit of confidence that the $5000 roof will cost just over $9000 in 20 years.
Geez, so now it's the $1,249 rent rule.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes11y
Originally posted by @Richard C.:
The Construction Cost Index in my region has been remarkably stable, at right around 3% plus/minus a couple tenths, for decades.
So I am going to say with a fair bit of confidence that the $5000 roof will cost just over $9000 in 20 years.
Geez, so now it's the $1,249 rent rule.
- Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes11y
While I understand your distaste for "rules", I am sure you are not saying that people should not account for the CERTAINTY of capex, are you?
And in my market, rent rates also increase by a pretty steady 3% a year, so yeah, the $1000 a month now will be more than $1000 a month in 20 years.
- Rental Property Investor · Indianapolis, IN · Member since 2014 · 354 posts · 167 votes11y
I agree with Ben. The large expenditures are going to eventually occur for a new roof, new windows, new furnace, etc. What he is saying is that you need to account for them in your current cash flow. You may not expend the $ in the next 5 or 10 years but it will eventually be expended. For example, a new roof on a 30k house would wipe out all profits for a single year in most markets. He his just spreading the cost across the years of the useful life of the repair and accounting them against the cash flow - which is showing the true cash flow of the property. It impacts cash flow - simple as that. You may have more $ in your pocket right now but surely you will have significantly less in your pocket some year in the future if you don't plan for it today. You need to decide how much you need to fund today (planned capital expenses) or accept that you are willing to risk your future income (unplanned capital expenses). This is simple accounting.
We all run our REI businesses in different ways. Plan the way you feel is right for your business but just keep in mind that he is correct in saying that just because you don't account for it today doesn't mean the profits (cash flow) are what you think. This is simple accounting principle in practice.
It is going to vary market to market, but I think there probably is some level of rent where you will spend less time dealing with renter drama/turnover etc. Even with a high quality property in the lower ranges, it will likely be a smaller and/or less convenient location so people will move more.
One significant exception could be a situation where charging below market rent leads to stability of tenants - where you really aren't doing a whole lot more than your typical high-end property. Although it is easy to fall into a trap their of underspending on repairs.
I think in terms of property values there is a level on the other side - where basically the rental market stops paying more. Again this is going to vary from market to market. While things like large lots and 5th and 6th bedrooms increase selling prices, they don't do a whole lot of rental prices. If you are making money on those properties - it is appreciation and tenants are paying the holding costs.
@Matt R. granted managing property is a little work. I have always considered managing properties as a separate business. I am retired and pay myself a management fee. I like it and managed between 6 and 9 units while working and it was easy while working 10 hour days.
Had a PM with a partner and it was horrible. Had to remodel each time they vacated which was after 1 year. Overall we lost our shirts on these tenants (twice) because of all the damage. Last remodel was to sell.
- 11yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
I think the point of the blog post was not to create another rule-of-thumb for the uninformed, but to re-emphasize that you need to understand at what you are looking when analysing a property. You are buying a business, not a property. Like any asset driven business, you need to set-aside sufficient reserves to ensure the long-term viability of the asset (or whether long-term viability is even an option).
- Residential Real Estate Agent · Atlanta, GA · Member since 2009 · 381 posts · 134 votes11y
I the Atlanta Metro Areas, there are plenty of single family rentals under $900.
@Matt R. great post! @Ben Leybovich was not trying to make a specific rule that a rental cannot cash flow at $1000. The broader point is that $30k, $700 rentals:
- Will generally attract C class tenants and require higher capex accruals
- Will not have much room for professional management
- Will not produce the paper returns most investors think they will due the squeeze on IRR by lack of appreciation
- CAPEX is a very REAL expense and is an accrued liability that simply cannot be ignored. Once calculated correctly, it will have a dramatic effect on returns.
- An investment must be judged over the entire hold period which includes the resale and NOT on a yearly cap rate or COC return projection
That being said, I own plenty of $700-$900 rentals and most do very well. But if I were managing from a distance with a PM, I highly doubt that would be the case. The lower end rentals will require a talented owner operator like @Dawn Anastasi to manage the tenants and the repairs. There is a big difference in how much a PM pays to repair a roof than what a local owner operator will pay. These small details are the difference between a 2% return and a 10% return. The margins are just that tight.
This also does not imply that a $1200 rental will guarantee success. Margins will be even tighter during the hold period as the purchase price will be higher at entry. The goal is that this type of asset class will attract and retain a higher tenant class AND drive IRR via capital appreciation at exit.
Regarding the comment by @Jeff G.
My sense is that Ben is extremely knowledgeable with many subjects. However he also makes very polarizing opinions on subjects he has no first hand experience with. My perception from his posts and personal website is that Ben only invested in large multi-families and apartment complexes.
There are lots of people who time and time again prove Ben wrong by saying they have been doing exactly what he is preaching not to do for 20+ years and have been very successful at it.
My only point is this. I am no expert at REI and am actually new at it. BUT Ben has a very narrow niche that he focuses on for his investments. That does not mean that there is only one way to make money in this business, or that every person who invests in other ways is a fool.
I can tell you that Ben has experience in both multifamily and single family. He speaks from a place where he has made these specific mistakes. More importantly, he is good at seeking out other investors and draws on investors with many years of experience and hundreds of units. I have personally sat down with Ben and compared our portfolios by asset and tenant class over 4-5 year holds to compare trends. Yes Ben can have a polarizing opinion but he is not speaking out of his ***.
When you hear stories of the insane returns people claim to be making off $30k rentals or a pitch for a turnkey, ask how long this person has held RE. Ask to see what the model looks like over a 5 year hold that INCLUDES the eventual resale of the property. Calculate the real projected rate of return. Accrue for capex, vacancy and turnover. I think you will see that the guys that have been doing this for a while are not so crazy after all.
- Omaha, NE · Member since 2014 · 201 posts · 85 votes11y
Originally posted by @David Krulac:
On one $750 house a new 50 year roof was installed in 2007 and a new gas furnace and central air was installed in 2012. So I'm not anticipating a big expenditure soon, but there is always the unforeseen.
I've had 2 properties involved in car accidents. One just about totaled the house, car left the road, at 4 AM and went through the concrete foundation and ended up in the basement, causing severe structural damage. I don't have a contingency for car accidents involving houses. Ended up donating the house to a college, who sold it as-is to a rehabber. Another house was in a flood zone where the 100 yr flood level was 8 ft above the ground, and in recorded history there never was flood waters higher than 8 ft. A super storm/hurricane came through and we had 13 ft of water, 5 ft on the 2nd floor. I didn't have a contingency for that either.
I have a friend with similar luck..... Some people just have a bad luck streak occasionally :) it'll turn around!
- Rental Property Investor · New York, NY · Member since 2011 · 956 posts · 510 votes11y
Do not agree. it is crazy to think 1 size fits all.
Ex: I invest upstate NY--buy for 45,000 put in 5-8,000 more
and rent for $ 800. Profit = 600 month after taxes.
I rest my case.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes11y
OK @Serge S. I will bite. I have been doing rental real estate for over 20 years and I do not own a single rent anywhere near $1,000 per month. My most expensive and nicest house I bought for over $110K and it rents for only $800 per month and I lose money on it. I bought it because I want to control who lives in the house next to me. The cheapest house in my hometown I bought for $30K and it now rents for $650 and I have fixed a lot of problems with it. It is rented to a school teacher with 2 kids. I have a house we bought for about $38K that rents for $650 and it is rented by a single school teacher. it has been leased to someone in the school system for about 13 of the last 15 years. I would guess $700 to $750 would be the top rent I could possibly get. We rented the property for $500 when we first bought it.
Ben is a great guy, an intelligent guy, an arrogant guy. I mean no offense its just patently obvious. yes it takes one to know one. you cannot make a rule that you say everyone should follow when in all likelihood 90% of the investors cannot follow it. There is not a house in my town I can buy for less than $150K and rent for a $1,000. In fact it may be closer to $200K. I would lose my shirt using exactly the formulas Ben wrote about. there is no town within 100 miles where I could do that. Not everyone can hit home runs. some folks have to live with singles and doubles. is cash margin tight? Yes, especially since I use 15 year loans for the most part. Is it like a job? Yes, but if I want a secure retirement that is what I will do. My only other option is the stock market or save and retire off my savings and social security. The amount I pay down on principal each month is equivalent to half of my gross current income.
You need to have a good understanding of true costs if you want to be in for the long haul, but to say if you do not invest in any house with less than $1K rent is pretty elitist, even for Ben. I would love to meet Ben and would probably enjoy the visit, but it would be hard for me to believe he is not arrogant. Many folks struggle to get into a $500 per month rental house. If they are careful and do it right however they can make it work and keep moving up into more or better houses. To some the extra work is the price of getting out of the vicious cycle of poverty. Maybe Ben's rule should only be for those who make $200K or more and do want to be bothered with any details of investing in real estate.
Ben knows more than I do about rentals. I did not know what capex was 10 years ago, but i knew there was cost to be reckoned with if the roof was getting pretty old. We didn't have a formula but took it into consideration. I do not think that the $1,000 minimum rent rule could be applied on a profitable basis in Wyoming except for those who bought right before the booms and rented during the inflated booms. I currently have around 25 to 30 units. Most are local with 1 in Indiana and 2 in Ohio.
@Jerry W. I think you made my point:) $1,000 rent is certainly not a rule and definitely not a one size fits all. I appreciate your model and do the same in my rural markets. My questions to you (and I think I know the answers) are:
- Do you property manage these yourself?
- Did you pay retail price or buy from a turnkey operator where his margin was in the price?
- Do you handle all repairs either yourself or find the vendor yourself?
See my point? I'm sure your making a healthy margin, saving for retirement and dealing with a decent tenant class. Now what would that profit look like with a PM in the middle OR if you paid $20k more for that same home? I also very much believe in the $30k-$50k asset class in rural America. But only when it buys you a home that one of your teachers would live in.
I'm sure that @Ben Leybovich agrees here. He has purchased $30k homes in Ohio. They were generally retail purchases. He still holds them years later and the returns are certainly nothing to brag about. And yes the guy is arrogant. He will admit it himself.
- Investor · Aurora, IL · Member since 2012 · 38 posts · 4 votes11y
What does IRR stand for?
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Not sure about the 1000 dollar rule.. but one thing I think is a flaw in the buy hold mind set is that these properties can be rentals for 5 to 10 years then sold to owner occ for a profit.
I don't see that at all ... even If you could somehow talk someone into moving into a rental area and being a new homeowner the improvements you would need to make to make the property RETAIL ready would probably eat up half or more of any cash flow you made the previous 5 years.
I see this with the current crop of smaller players starting buy and hold funds... I read these PPM's and the business model is all the same.. some type of cash flow generated by rents. Say 8% to the investor.. then they are going to sell in 5 years for a big profit so investor then cash's in and makes a PROJECTED 20% plus return.. I think this is wishful thinking as there is no provision in the PPM for major reno to get it ready to sell at the end of the term. I think its very wishful thinking that a home used and maintained just enough to be a rental will sell for a profit great enough to meet the PPM sponsers projections. Now caveat being inventory that was bought 2 to 4 years ago at the bottom of the trough.. but for these NEW PPMs just coming into the market I wonder
Originally posted by @Jose Perez:
What does IRR stand for?
Internal Rate of Return. Just a fancier way to calculate the return on an investment that factors in the entire hold period rather than a point in time. You would factor time value of money and such but for a simple SFR over a short hold you can keep it very simple. Search @Ben Leybovich blog posts for the exact formula and how to apply it to your needs.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes11y
Hey @Serge S. , sorry apparently we read different different articles but both by Ben. I would love to get a guy like him in a group feedback/encouragement group. One bad thing about being in a small town is it is hard to get a lot people with the same interests with limited opportunity.
- Investor · Isabel, KS · Member since 2015 · 247 posts · 85 votes11y
I would not agree with the $1000 per door rule. It can depend greatly on where you are in the country. Not all money making RE investments need to take place in a big city or metro area. There are many places where smaller communities have faced pressure on housing units available and it can make for a very strong rental market and strong rents. The investor can make very nice and dependable returns on property in these areas and to a large degree there aren't that many jobs that would pay the 3,000$/mo it would require to afford a 1000$/mo rental payment.
1000$ per door would be pretty nice in my area, then again I know a lot of property that would require substantially more than that to rent out and cash flow!
Originally posted by @Jay Hinrichs:
Not sure about the 1000 dollar rule.. but one thing I think is a flaw in the buy hold mind set is that these properties can be rentals for 5 to 10 years then sold to owner occ for a profit.
I don't see that at all ... even If you could somehow talk someone into moving into a rental area and being a new homeowner the improvements you would need to make to make the property RETAIL ready would probably eat up half or more of any cash flow you made the previous 5 years.
I see this with the current crop of smaller players starting buy and hold funds... I read these PPM's and the business model is all the same.. some type of cash flow generated by rents. Say 8% to the investor.. then they are going to sell in 5 years for a big profit so investor then cash's in and makes a PROJECTED 20% plus return.. I think this is wishful thinking as there is no provision in the PPM for major reno to get it ready to sell at the end of the term. I think its very wishful thinking that a home used and maintained just enough to be a rental will sell for a profit great enough to meet the PPM sponsers projections. Now caveat being inventory that was bought 2 to 4 years ago at the bottom of the trough.. but for these NEW PPMs just coming into the market I wonder
Couldn't agree more. I have never sold a home to one of my tenants. I end up losing my best tenants as they buy newer SFRs. When I do decide to sell I ALWAYS have a "retail ready" remodel. Its very different how I prepare a home to sell to an owner to what I do for a tenant. These costs can be substantial. Combine that with closing costs and commissions and you need a very hefty premium to purchase price to realize those returns. I have done fine with the stuff purchased 3-5 years ago but the ones I buy today I just assume longer term rental and make sure I'm buying enough equity on the front end to underwrite the exit accordingly. My exit has been to sell to an investor at 5-10% off retail and off market. I only do this when there are other homes I want to buy that have better return on equity or I'm 1031ing into a large apt complex.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes11y
I've done it a few times, selling their rental house to the existing tenants. A couple of different tenants were there about 4 years when they bought. They got new bank mortgages, I did not carry paper and got retail price.
I did not have to advertise the property, I didn't pay a commission and I didn't have to clean and paint the property or do other work to prep the property for sale. And they appraised for the sale price.
It doesn't happen all that often, so its not a common occurrence, but I have had others where the tenants bought their rental. I've offered properties to many tenants who did not take me up on my offer. I've even had tenants say to me, if you ever decide to sell, let us know.
The 2 examples above were not in rental neighborhoods. One was on a cul-de-sac street with 22 houses, 20 of which were owner occupied. Guess who owned the other two?
The other example was on a street with 20 SFHs, of which only 4 were rental, guess who owned them? In both examples all the rentals on the street were sold to owner occupants and the last time I check neither street had any rentals.
Of all the SFHs that I have ever sold, only one comes to mind that was sold to a landlord; all the rest were sold to owner occupants, but unfortunately not all to my tenants.
I like it as an exit strategy, but it doesn't happen with the frequency I would like.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes11y
Here is the quote from the article I read from Ben
Due to nothing more that this CapEx number, it takes a minimum of $1,000/month rent to even begin to think about cash flowing SFRs, and you ain't getting that for $30,000…
This is the article I read.
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