Investor · Newburgh, IN · Member since 2014 · 63 posts · 47 votes
Has anyone every heard of analyzing a rental property by taking 26% (or 74% of the monthly rent) off the monthly rent and multiplying by 60 months to come up with an offer price?
Ex: $500/mo rent x 74%
$370 x 60 = $22,200 offer price.
I think it might be a good rule of thumb but it seems a little black and white for analyzing every deal. Specifically, I'm looking at some properties that the owner is renting way below market price...so using these analytics makes the offer prices crazy low. Like...less than half of retail..
@Ryan Pemberton So at an asking price of 100K for a property that rents at 1000/month(exactly standing at 1% rule) you will end up offering 44.400. That's a nice chunk of discount there at 66% off asking price.
Who will accept this price and why on earth would they do that?
@Ryan Pemberton So at an asking price of 100K for a property that rents at 1000/month(exactly standing at 1% rule) you will end up offering 44.400. That's a nice chunk of discount there at 66% off asking price.
Who will accept this price and why on earth would they do that?
@Florian N. Exactly! That's a one in a billion deal. They barely exist and if that's a rule someone follows, they'll never get a property. Ever. I'm working with some cash buyers that don't want to go more than that. They're new to real estate and super cautious, which is good..but a little too safe in my opinion.
@Ryan Pemberton I'll say it's time to look for other buyers.
There's more to calculating an offer price than just a simple rule like that which doesn't make much sense as it is. They aren't making an offer for an item at a yard sale.
Really, real estate investing is far too intricate to be broken down by a bunch of rules. Every deal is going to be different, and using some weird rule like this to analyze all your offers is only going to prevent you from making any money!
Thanks for the feedback. I was starting to think I was crazy. The owner of the rental hasn't raised rents in 19 years and she's at least 30% below market. She's an elderly woman that is wanting to unload her properties and travel in her final years of life. Her husband acquired several properties through the years and rented them out. He passed on several years ago. She's managing herself and is wanting to retire. I can understand her position!
So, going by rental numbers that are that old and outdated, the offer price 26% is coming up with is seriously low. I'm talking about a SFH that retails for $75,000+ and they're stuck on a $23,000 offer. The house is currently occupied by a good tenant (has been for years) and not in bad repair at all.
I personally find it an insulting offer and I don't even want to take it back to the seller.
(Sadly, it's part of a large portfolio that I can't afford, so I'm trying to partner with some guys to still own a piece of the pie.)
Not sure if you already did this but any REIA meetings in your area were you could try and take this property to? Try and post it in the BP Marketplace as well, maybe another investor from the area will be interested?
I see there are a few investors from your area on BP, maybe one of them might be interested, or who knows maybe someone looking for a long distance deal?
Sadly, the only REIA group is an hour and a half away and it covers more of Kentucky and less of Indiana. There's a meetup group locally. I might have to farm it out but the seller has already very clearly stated she doesn't want it to be a wholesale deal. She's been approached by several other wholesalers in the area..which is why I'm trying to partner on a full buy-out.
I'm going to do some more convincing and see where it gets me. I may just have to see if she'll let me cherry-pick a couple of the properties and let the rest go...but that's not idea.
@Ryan Pemberton I'll say it's time to look for other buyers.
There's more to calculating an offer price than just a simple rule like that which doesn't make much sense as it is. They aren't making an offer for an item at a yard sale.
LOL! So true. Yeah, you'll get frustrated with them REAL quick.
@Ryan Pemberton That is a pretty low offer and I agree, you would gt so few deals you would grow very slowly. Your newbie buyers are being way to cautious, especially considering the fact they are rented under market.
No I have never heard of that formula. I suspect your new buyers have misunderstood some more common formula.
I disagree with @Jarred Sleeth. There are some common "Rules of Thumb" that you'll find here on BP. Lots of investors use them and are successful with them.
The fact is almost everyone uses some guideline to screen their deals. There is not enough time to look at every deal that comes across our desk. Baltimore county currently has about 3500 listings. My inbox gets flooded with "deals" from wholesalers. There is no way to effectively evaluate each and every one. You have to use some filter to get to the ones that make sense quickly.
I will agree with Jared, that real estate is complex. The most successful investors are able to look at many factors to find value where others are missing it.
Ryan, are you an agent? If so, how are you sourcing your deals? Are you just looking MLS? Best deals usually come from wholesalers, and even though a deal like the one you mentioned is still more than uncommon, a wholesaler can definitely get you some good deals.
A GOOD wholesaler, that is. It'll be up to you to know if the deals they bring you are good deals or not.
I tend to go by cap rate as a general rule of thumb and every single property on this portfolio exceeds a 12% cap. Some are as high as 25%! It is an intricate business and I really want to partner with these guys because their capital resources are huge but, like you said, it'll be slow going using this 26% analysis tool.
I'm actually working through the online classes to get my broker's license now. I don't really want to be a full-time agent but I think it's a pretty valuable card to have in the ol' tool belt. This portfolio was actually found by me from driving for dollars and my own yellow letter campaign. I was going to wholesale one of the properties but when she called me, she told me she had a whole spread of SFHs, duplexes, and a triplex to unload! I run a pretty mean yellow letter campaign and seem to be able to sniff out deals like a fox, I just don't have a lot of cash up front to throw down.
Thanks for the input, guys. I'll post something if I manage to close this thing!
@Ned Carey Yes, there are rules of thumb that are commonly used (though this one I've never heard). I think what I was trying to get across was not that they don't work, but they aren't always going to apply. The best thing you can do is be familiar with your market, and deals will be more apparent with practice and experience.
That sounds like a great rule. I don't think I can find those kind of deals here in sw Missouri, hopefully some of you can.
I'm happy reversing the 1% rule, buying houses I can rent for 1% of the purchase price.
My name is Bryan Drury, located in Owensboro, Ky.Im interested in your deal.The rule you spoke of earlier is obviously not realistic, in our area.I would like to discuss further if you are interested.270-929-4182. Thanks