Rules of Thumb

3 Replies

What are your favorite rules of thumb for REI--something you use all the time that helps you quickly evaluate a deal? What are your least favorite--a rule of thumb you've picked-up here or elsewhere that's either inadequate or flat-out wrong?

When I'm looking for a rental I like to use 1% of the purchase price + renovation cost to find my PITI (principal, interest,taxes and insurance) to see how much it would/could potentially cash flow at.

Example: I purchased a Single-Family residence 2 bed / 1 bath for $40k put another $30K into it and made it a 5 bed / 3 bath 

$40,000 + $30,000 = $70,000

$70,000 x 1% (.01) = $700 for my PITI

5 bed / 3 bath in my area I can get $1,450 for rent 

So $700(PITI) - $1,450(Rent) = $750 cashflow (roughly)

my minimum cashflow is $300/month

I'm not including vacancy, management fees and capital expenses, but this is what I do when I'm first looking at a property that I want to buy and hold. again this is for my area and debt service in my current situation.

I'm not even sure what you call this rule.

My favorite is the 2% test. This means the monthly rent is at least 2% of the purchase price.   It is  a quick way to quickly rule out deals that won't work as rentals for me. 

The number you choose to use will vary.  I actually buy at 3-5% because I can find those deals. But 2% at least tells me this is something I can look at.  

Some people may use 1%. that is certainly easier to do in your head. 

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