1-2% rule, got 1.23% but it still looks like a bad deal

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1-2% rule, got 1.23% but it still looks like a bad deal

Tzook Bar Noy
Rental Property Investor · boca raton, FL · Member since 2015 · 43 posts · 20 votes

I have a deal that on the bottom line will cost: 85K

rent is 1050$ monthly,

a year = 12600

and expenses:

- manegement - 10% rent = 1260

- insurance = 800

- tax = 1300

- fixes 10% = 1260

- vacancy 10% = 1260

total income = 12600

total expenses = 5880

yearly profit = 6720

ROI cash only = 7.9%

** this home is on Decatur area in Georgia

Is my calculations right? it looks good at first, but super lower roi then expected...

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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y

@Tzook Bar Noy the problem with your ROI calculation is that it has nothing to do with the 1-2% rule. That is because it is all about income and expense, which varies. Your low ROI stems from the fact this is an all cash deal. Run the numbers if you were to finance the property with 20% down ($17K).

$68K for 30 years at 5% yields a payment of $365 per month or $4380 per year

So your net income is $1500, which would be an ROI of 8.8% based on $17K down payment.

I would also challenge your insurance number as being too high. I pay half that much for a property worth twice as much. Assuming your actual insurance was $400, then it changes to this:

$1900 with an ROI of 11.1% based on $17K down payment.

You can see how a small change in income will affect your ROI. In another situation if you self manage and have no vacancy, then your ROI increases to 26%.

Financing not only means higher ROI, but also leaves money for down payments on several other properties. You can buy four properties instead of one and your net income increases 4X.

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  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y
    Tzook Bar Noy No mortgage payment??
    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    If only those goofy rules of 1%, 2%, 50% were black and white - - they are not.

    Many parts of the country don't even get 1%, so your precise 1.23% is on an imprecise 'rule of thumb'. Some are drooling to get a a 7.9% ROI

    0Reply
  • Tzook Bar Noy
    OP
    Rental Property Investor · boca raton, FL · Member since 2015 · 43 posts · 20 votes
    9y

    @Ralph R. we are foriegn investors so they have cash in hand, but look for good deals and then refinance them.

    @Jeff B. I know there are several rules out there, but as I keep learning and reading the blogs, podcasts etc, I see great ROI of over 12%...

    Just wanted to know what have I missed in my calcs and just getting to get some info from the pros

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Tzook Bar Noy that's why your ROI is so low. Change your numbers to reflect a 20-25% down pmnt and a mortgage on the remainder. Now your investment is a way lower number Also my area doesn't need that much vacancy or depending On the property I don't need that much for repairs. Make sure all your numbers are real not ball park. They all look high compared to my areas. RR

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @Tzook Bar Noy the problem with your ROI calculation is that it has nothing to do with the 1-2% rule. That is because it is all about income and expense, which varies. Your low ROI stems from the fact this is an all cash deal. Run the numbers if you were to finance the property with 20% down ($17K).

    $68K for 30 years at 5% yields a payment of $365 per month or $4380 per year

    So your net income is $1500, which would be an ROI of 8.8% based on $17K down payment.

    I would also challenge your insurance number as being too high. I pay half that much for a property worth twice as much. Assuming your actual insurance was $400, then it changes to this:

    $1900 with an ROI of 11.1% based on $17K down payment.

    You can see how a small change in income will affect your ROI. In another situation if you self manage and have no vacancy, then your ROI increases to 26%.

    Financing not only means higher ROI, but also leaves money for down payments on several other properties. You can buy four properties instead of one and your net income increases 4X.

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    Also your expenses seem bit high to me. $800 for insurance is like what I pay for a $450,000 house in my market.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
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  • Loreal Amporful
    Realtor · Decatur, GA · Member since 2015 · 74 posts · 18 votes
    9y

    My farm area is Decatur mainly 30032, Many of the investors I work with typically look for 10% or more roi in that area...7.9% isnt bad but depending on your exit strategy, and your numbers it isnt the best deal.

    0Reply
  • Jon Q.
    Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    9y
    Originally posted by @Tzook Bar Noy:

    I have a deal that on the bottom line will cost: 85K

    rent is 1050$ monthly,

    a year = 12600

    and expenses:

    - manegement - 10% rent = 1260

    - insurance = 800

    - tax = 1300

    - fixes 10% = 1260

    - vacancy 10% = 1260

    total income = 12600

    total expenses = 5880

    yearly profit = 6720

    ROI cash only = 7.9%

    ** this home is on Decatur area in Georgia

    Is my calculations right? it looks good at first, but super lower roi then expected...

    The 1% rule is bull&*$# and it's doing more harm than good for those of you applying it. Instead, learn to run your own investment analysis, including the cash-on-cash return (COC) and internal rate of return (IRR). Google "APOD" (which stands for Annual Property Operating Data) to locate the form/template that will help you create your own investment analysis in excel. The APOD is a form developed by CCIM to standardize the investment analysis of real estate investments.

    I wish you the best.

    0Reply
  • Hashim Dean-EL
    Investor · Columbus, OH · Member since 2015 · 4 posts · 0 votes
    9y

    The insurance numbers definitely seem a bit high for that area. In that zip code the going rate for insurance is nearly half the amount you listed. I would shop around for a better rate. Also, as others have mentioned you have to take into account the down payment on a loan for the property as opposed to an outright cash purchase. This will change the ROI significantly. Makes more financial sense in my opinion.

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