@Bryan Beal In my market talking SFR's, only the best of the best deals can you get %1 on. If you bought a retail $300,000 house here, you would be able to rent it for around $2000-$2200/mo. So you need to buy super cheap in order to hit %1. I've acquired only 1 property that hit the %1 rule in my area. My general rule of thumb is cash-flow $100+ each unit. That's much easier in my market than hitting the %1 rule.
I thought about this a lot myself when I first began looking for properties near me. It seemed only 1.5% and lower while I was hearing of 2% deals on biggerpockets. After analyzing over 20 rental units in my area I came to the conclusion it wasn't reasonable. Multi-families got close but all SFH we're all under 1%.
I changed strategies to comparing market caps and started seeing differences between properties that were easier to understand. I have analyzed a lot more deals since then and highly recommend looking at market cap when the 1% rule doesn’t work for you.
Lastly, in general, SFR bought without many issues to fix won't have as high of a cap rate as multi-families. I recommend running the numbers and seeing the difference yourself. You may consider switching to multi!
@Daniel Iles thanks for the input, greatly appreciated! I probably should have mentioned in my original post that I’m buying class A properties averaging around ~$225K - I don’t think buying at that number and that class of asset this is a fair benchmark. If you’re buying homes for $30/$40K per, that’s another story. I guess, like most things, it’s a matter of context.
@Bryan Beal obviously that return is location dependent. What people fail to mention is real estate markets are fairly efficient, which means the purchase price to rent ratio is largely dependent on expectations of appreciation, and those expectations are “baked into” home prices
If you are analyzing 25+ deals and looking for ways to narrow it down to the best, then yes, a range of 1%-2% is a decent range to help narrow it (among other things). I’d never buy a rental based on that alone though.
@ Ronald Cooperman would you care to provide additional details wrt "limited partnerships"?
@Bryan Beal my first property is a 3 unit and I’m at about 3% with rent vs total payment. Any input ?
At some point the 2% rule became the 1% rule. Not sure when but go back to the early podcasts.
With that being said I am getting about 1.3% in philly, including renovation costs. But it gets harder and harder to find.
Often times it is closer to 1% at first, but rents have been going up lately (although this year they seem to have stalled out).
@Bryan Beal I've found SFR are difficult to apply the model to, especially in "good" markets. Multiple doors are always the way to go.
@David Lust man, I think that’s great! Did you it this place for just cash flow or did you buy it because it has appreciation potential?
@Bryan Beal I think every investor has to find their own sweet spot regarding all the "rules". Personally I don't pay much attention to the 1% rule but focus more on cap rate when buying and IRR to measure performance over time. Being in a high appreciation market with increasing rent, most of my purchases were around .6-.8% but have since gone above 1% with rent increases. As far as owning them I actually prefer the ones that were lower on that scale, closer to half a percent. In just a few years we've seen extremely high IRR on those compared to the ones that approached 1% because they are class A meaning easier to manage, less expensive to own, much higher appreciation leading to increased equity and wealth. For example one that we were just barely breaking even on in the beginning, and actually negative about $30k on during the first year because of improvements, has appreciated over 7 figures in just a few years which would have taken literally 1,000 years to get to with cash flow if it had been a 4-5% deal with flat appreciation. So for me I want a little bit of both, some cash flow and some appreciation, not negative cash flow but not negligible appreciation either, because increased wealth is what makes it all worthwhile to me so projected IRR is a much better metric to use than the 1% rule. If I just wanted a couple thousand bucks in cash flow a month, I'd keep everything parked in dividend stocks and not deal with the hassles of owning property, so I've got seek out the smart plays where the IRR beats what I can get consistently in truly passive stock investments. They say don't buy on appreciation speculation due to risk of values decreasing, but the fact is a lot of these 4-5% low end rentals are extremely high risk themselves. On a $80k property with even 5% rent to purchase price ratio, your gross annual profits aren't that great in total and can be wiped out with one unexpected event like a furnace or sewer line or an eviction/vacancy or even something as basic as a water heater clapping out and leaking everywhere (there are a boatload of uncontrollable variables when dealing with low end rentals), so 5% on paper often ends up being 0% or worse and you're just suffering the brain damage of managing a low end rental for nada. At least if it's appreciating you've got enough increased equity to make it a worthwhile endeavor. I think the answer for me is both, finding the right mix of cash flow and appreciation potential, which in my market means a 5-8cap which ends up being around 1/2%-.8% according to the 1% rule. Properties that meet the 1% rule can be found, but less people want those properties and they're priced the way they are for a reason.
Originally posted by @Jeff S. :
I get 4%+ in Portland but I did have to wait a while-uh that would be 28 years, but who is counting. The real return has been appreciation. With the 50% rule you are talking a 3 cap or 1/2% and it has been that way a long time. Appreciation drags rents up and it is easy landlording with happy renters.
The value add people are the only ones around here making a decent return from rents and you need to know what you are doing.
yup give me a .05% for a long term hold in a great area.. end of a 25 year run.. compare that to a 2% deal in other markets
see what the real IRR is..
cant discount that those that enjoy the better higher numbers we see posted above are ALL locals who source their own deals do their own rehabs ( manage them ) and handle the tenant base personally.. or very hands on.
other folks from other areas who have to hire it all out while they can do OK they cant feel defeated if they don't do what the locals do.
Also properties price for risk.. there is no question in that..
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@Bryan Beal . I have a property I bought in 2009 for $245k. Today it is worth about $390k.
Are you saying I should be renting it for $3,900/month? Currently renting at $2,050/month.
Almost all the houses in the same area all rent for $2000-$2400/month.
I don’t know if that 1% rule works for higher amounts say > $250k.
Currently doing this in Detroit market, seems to be working well so far
Here are Some examples of nimbers on 3 properties
Got some higher end values $70,000 but these are for flipping strategy
$32,000 - $800
$36,000 - $900
$35,000 - $800
@Lesley Resnick they are a bit aggressive, as one's should be when investing in an asset of such small scale where diversity doesn't dilute the effect of variability in expenses.
100$ owner paid utilities on a 200k duplex is actually an optimistically low representation of sewer/water/garbage/mowing/snow removal (if pertinent).
$2400 a year (in maint/repair/capex) is also a very fair representation. Most people don't buy properties will all components replaced in the last 5 years. If you take the cost of replacement of all components, divide each one by the number of remaining years of lifespan of that component, and total those yearly reserves for each component you will get your total holdback # for maintenance. This is a far more realistic approach than using a trailing 24 of schedule E's from the seller, or actuals as incidentals occur.
If you break down a few items:
Roof: 20 years @6000 = 300/yr
AC: 15 years @3000 = 200/yr
Furnaces: 15 years @1700x2=3400 = 225/yr
Water heaters: 12 years @800x2 = 1600 = 135/yr
Windows: 30 years @ 4000 (low) = 135/yr
Note that these numbers all assume these items are brand new when you bought the property. The # of years to be used are the *remaining* years in the components lifespan at the time of purchase.
There's $995/yr right there, and it excludes any improvements required to plumbing/electrical/floors/paint/kitchens/bathrooms/siding/basements/garages/sewer lines/etc... On top of that, add a maintenance and cleaning budget. $2400 a year is more than fair as an average over time. Now, the variability year over year will be high... but over 30 years of ownership you will have performed all of those cap ex items with a hefty amount of maintenance to go with it.
Unfortunately, I've found many investors I work with to have made investments in the past with Geoffrey Dollars. Commercial lenders just don't want to be on the hook for those irresponsible investing decisions, because they're actually lending bank dollars.
Conventional lenders don't bother much with debt coverage because the bank makes the profit, but spreads the liability over to Fannie Mae, so who cares.
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