How to analyze a rental property when it doesnt meet the "norm"

1 Reply

I recently signed on as a PRO member and it is definitely worth the investment.  Glad to be here.  

I am currently working on my first fix and flip and things are looking good, but I didn't really have time to look at the numbers as if it were a rental unit to hold on to, but now that I am about to finish and sell the property, I am diligently looking for my first buy and hold rental.  My end goal is to acquire as many as possible for long term passive income.

My question, as the title suggests, is how to properly analyze a deal and what MOST folks like to use as a measuring stick to be considered a good deal.

Brandon Turner says he only jumps on a rental that will bring a 12% cash on cash return after everything is accounted for (PITI, vacancy, maintenance, cap ex, management, etc.) But then he also says that to cash flow $100-$200 per door is a winner as well.

From my many many many calculations here in the Greenville, SC market, I am not hitting on anything close to those numbers.  The 12% cash on cash that is,  There are plenty of homes that I can accumulate $100+/mo cash flow but the return is no where near 12%. 

So a few questions - should I hold out until that "perfect" opportunity presents itself, or do I just live with the fact that it is few and far between in this hot market.  I am a real estate agent and can buy properties at a 3% discount on top of anything I can work out in negotiations, but even still - I have seen nothing that hits above a 9% cash on cash return.  

Some people tell me to go after homes that hit the 1% model which I have found 2. One is $54,000 and rents for $550/mo but after those calculations, it ends up only being a 6% return. The other one is a duplex that is $100,000 and rent is a combined $1100/mo but those numbers only become a 12% cash on cash return if I can buy it at $80,000 which simply won't happen. The market is too hot. There are two duplexes and not on the market, but once they hit the MLS they will sell in a heartbeat.

Follow up to these questions:  What do most of you do with the vacancy reserves if the house has none in a year period.  Do you put it towards the house, do you pocket the cash, or do you keep it stored away year after year?  Same goes for maintenance reserves.  If there are no repairs over, say, a two year period, and you have $3400 saved up, what do you do with that?  

Thanks for any and all responses and glad to be here.  

Hi Blair, Greenville has become a tough market over the last few years. I have a couple of properties I bought last year, that I would not invest in if they were on the market today. I'm not bragging, that's just the reality. Greenville has super low inventory and lots of institutional investor activity.  

The returns Brandon talks about are guidelines, and that's all. Every market is different and every investor has different goals and timelines. You have to figure out what investment profile works for your situation. 

$100 monthly profit per door doesn't allow much room for things to go wrong, and they do. One plumbing issue and your entire year is wiped out on that unit. You also have to look at WHEN Brandon was buying and writing articles/podcasts. It was not in today's market. 

Wait and get the right deal if possible. Houses are sold in every market condition. Would it be a disaster to wait 6 months or a year and build your savings? Would it be ruinous to buy the wing house because of impatience and lose $50,000 by the time you get out of it?

Always hold your reserves as reserves. This is a business and bad things happen. Ok, tenants are in place now. Will they be there next month? Will rent come through? Will you have to evict and pay court costs while not collecting rent in three months?  If you don't have those contingencies covered you will be in a world of hurt.

I'm not trying to discourage you. I've run into every problem I've discussed. My first property was bought in 2007 at the right of the bubble. My tenant lost his job when the bubble bursting and stopped paying rent. It took so months to finally get him out. If I didn't have the reserves, I would have lost the house. For to the bust I was underwater, so refinancing was out of the question. The next tenant cracked the toilet and didn't tell me, then he went on vacation. I found out when I was checking the house out and saw water slowly leaking down the siding. If I was only clearing $100 a month, I wouldn't have even been able to cover my insurance deductible.

Please learn from my mistakes.


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