Purchase price to rent ratio?

Buying & Selling Real Estate
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Purchase price to rent ratio?

Will G.
Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes

Often discussed but don't individual markets have a bearing on the Ratio?
What would be the most you would pay for a single family (including rehab and associated costs) for a home that rents for $900/ month? Assuming all cash deal

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Mitch Kronowit
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
14y
Originally posted by Nathan Emmert:
Originally posted by Curt Davis:
Out of curiosity... if there are markets that can get 2 or 2.7% rents... versus a home market at 1.15%... why wouldn't you go to the more lucrative areas?

Lucrative? Not the word I would choose. I would use the word "volatile". Yeah, you may get 2% the first month, but what if your crack-whore tenant with the 3 illegitimate kids and live-in boyfriend-of-the-month stop paying after that? How many months of ZERO rent will you have to wait before getting that 2% again? What if your rental gets quarantined for 4 months because it was turned into a meth lab? Or your last tenant loaded all your copper pipes and wires into their U-Haul when they left? You still getting 2%?

I'm not interested in "snapshots" of ideal situations, and these low-income, low-value properties are rarely ideal. Sure, I may get a little north of 1% in my market, but it's STEADY (solid blue & white collar tenants with stable incomes/jobs). And besides, I'm in this game for the upside, not the monthly rental scratch. Let's all meet back here in 10 years and compare total returns. :idea:

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  • Guru Srini
    Engineer · Mountain view, CA · Member since 2009 · 19 posts · 1 vote
    14y

    45K as per 2% rule

    0Reply
  • Mitch Kronowit
    SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
    14y

    About $80-90k because in my area a $45k SFR is either a mobile home (minus the land) or in the midst of a drug turf war.

    0Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    Hmmm, haven't priced them real well but homes under $100k out here are few and far between. I'd say $80 - 100k.

    0Reply
  • Will G.
    OP
    Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes
    14y

    I am in the epicenter of the foreclosure crisis, port st lucie fl and a 3/2 that will fetch 900/month is
    going to sell in the 65 to 70k range. The upside is a great rental market ie plenty of folks lost homes and credit need rentals.

    1Reply
  • Justin S.
    Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
    14y

    My clients like to see 1.15% of purchase price for rents. These are for newer homes in nice areas.

    0Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    14y

    The only people buying property at a fixed up cost for $45k that rents for $900 are the actual wholesale investors, this is not a price that an investor could expect to pay from a wholesaler. Our clients on average are paying about $65k-$70k for a $900 a month rental.

    Curt Davis - KAIZEN Realty538 Reviews
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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    14y

    Also, throw the 2% rule out the window. It is not a real relevant indicator for every market these days.

    Curt Davis - KAIZEN Realty538 Reviews
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  • Ryan B.
    Investor · -, IL · Member since 2010 · 409 posts · 616 votes
    14y

    Depends on the neighborhood. If it is a nice area that is going to appreciate in the long run I would say 70k - 80k.

    Low income area where you are getting that much rent just because it has a bunch of bedrooms, I wouldn't give more than 40k max.

    I have both, guess which one I hear from the tenant once every 6 months and which one I hear from each week.

    1Reply
  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    2 percent rule starts to loose relevancy once you start exceeding gross rents of around 500 to 500 in my area and in many others from what I have gathered on BP.

    Is the 2 percent rule more applicable to multiple unit buildings when moving into higher prices?

    0Reply
  • James Martin
    Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes
    14y

    If I was to purchase it would be in the $40s.

    0Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    14y

    There are not many if any places here in Memphis where you can be all in for $40k and have a home that rents for $900 per month. If you can find them bring them to me all day long and I will buy every one!! One of my best personal holdings I am all in for $46k and is rented section 8 for $895.

    Curt Davis - KAIZEN Realty538 Reviews
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  • James Martin
    Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes
    14y

    First of all Sir, I said in the Fourties. For the sake of the impaired thats $40,000 to $49,999. Now, just because your personal and best holdings don't weigh up, does that make my statement untrue Mr. Davis. The question was how much would I pay and I said in the $40,000s. There are places here where you can be all in for $40k and rent for $900. Maybe there is opportunity after all for us to work together now! From time to time just to name a few areas where you can catch a deal like this would be in the Reese point sub, Country side sub, and the Trafalgar sub. 2197 Bobolink just sold in Oct for $34,000. I don't know how much it cost you for renovation, but most of these homes are pure cosmetic rehabs that I can get done for $10k to $15k easy, and that still puts me in the $49k bracket. For more information, feel free to give me a call. Your friend James.

    0Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y
    Originally posted by Curt Davis:
    Also, throw the 2% rule out the window. It is not a real relevant indicator for every market these days.

    Out of curiosity... if there are markets that can get 2 or 2.7% rents... versus a home market at 1.15%... why wouldn't you go to the more lucrative areas?

    I understanding starting locally, paying your land lord dues and making your bones in areas close to home from a logistics point of view... but after you've done a few, is it wise to continue in a less efficient area or expand your horizons to better investment arenas?

    I mean, we could all just chug money into our 401k's and let Fidelity or whoever control our retirement... most of us are willing to do the extra work of being a land lord or RE investor to boost our returns... by that same token, why wouldn't we be willing to be a bit more geographically mobile in our investments to further boost those same returns?

    0Reply
  • Joe O
    Investor · Las Vegas, NV · Member since 2011 · 92 posts · 25 votes
    14y

    I've found most advice on the contradictory Nathan. People say to invest geographically where you'll make more, and then they say stuff like "boots on the ground" and "know your market."

    Pick one or the other, because if it's 3 states away, you won't be able to know your market nearly as well, nor have as much time in with boots on the ground.

    Some prefer one way, some the other.

    1Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    14y

    @James - correct, it could be $49,900.

    @Nathan - putting your money with Fedelity is a gamble and you could loose it like many have. IF you can find places that provide a 2.7% ROI its probably in an area like Detroit. I have found that you can find higher returns but almost always are in rough areas with higher crime, vacancy and maintenance. To me, the lower ROI in a better area will always produce better over time.

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
    2Reply
  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    14y

    I agree with Joe that I have found most advice on the contradictory.

    Also, I don't think it's always about where you can make the most money, at least not for me. For me, it's also about having peace of mind at the end of the day and knowing that everything is going well with my investments. Another thing you need to factor in the out of state investments is the extra cost of flying down every now and then to check on your properties. Once you start adding in the extra costs and time spent, the higher return doesn't look as good, IMHO.

    To answer the OP's question, for a SFH, in my market I can get $900/month with all in cost of around $40k. The ARV of these homes will be around $65-75k.

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  • Kyle K.
    Real Estate Investor · Chicago, IL · Member since 2008 · 122 posts · 46 votes
    14y

    I also agree with Curt. Why in the world would a thirty-something year old buy a sfh for $50K cash for $850/month rents? First of all, this individual is using no leverage. He's not building equity with pricipal pay down (yes, I understand the cash flow from said propert could be used to build equity in other ways). Whatever place he purchased is either old as hell, in a very undesirable area, or both. And, most importantly, what the heck does a 30-something year old need with huge amounts of cash flow? He's sacrificing capital growth as a result.

    With that same $50K cash, you could use it as a downpayment on a brand new duplex worth $250,000. So, instead of owning a crappy $50K shack, you could own a brand new $250K property in a fantastic area. Your long-term prospects are immesurably better.

    1Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y
    Originally posted by Kyle Koller:
    I also agree with Curt. Why in the world would a thirty-something year old buy a sfh for $50K cash for $850/month rents? First of all, this individual is using no leverage. He's not building equity with pricipal pay down (yes, I understand the cash flow from said propert could be used to build equity in other ways). Whatever place he purchased is either old as hell, in a very undesirable area, or both. And, most importantly, what the heck does a 30-something year old need with huge amounts of cash flow? He's sacrificing capital growth as a result.

    With that same $50K cash, you could use it as a downpayment on a brand new duplex worth $250,000. So, instead of owning a crappy $50K shack, you could own a brand new $250K property in a fantastic area. Your long-term prospects are immesurably better.

    Overly simplistic view in my opinion, sorry.

    What can I do with cash? Buy more property. Cash is real, cash buys. What does your equity growth do? Absolutely nothing. You can't necessarily leverage it as you aren't sure you can get it out, you're at the mercy of banks and interest rates.

    As for properties... buy something now and wait 30 years. What's the problem with a new home today in 30 years... well, it's 30 years old. Instead, buy a 90 year old home today. In 30 years it's 120 years old... heck, it was already 90 years old and going strong, what's another 30 years!

    0Reply
  • Mitch Kronowit
    SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
    14y
    Originally posted by Nathan Emmert:
    Originally posted by Curt Davis:
    Out of curiosity... if there are markets that can get 2 or 2.7% rents... versus a home market at 1.15%... why wouldn't you go to the more lucrative areas?

    Lucrative? Not the word I would choose. I would use the word "volatile". Yeah, you may get 2% the first month, but what if your crack-whore tenant with the 3 illegitimate kids and live-in boyfriend-of-the-month stop paying after that? How many months of ZERO rent will you have to wait before getting that 2% again? What if your rental gets quarantined for 4 months because it was turned into a meth lab? Or your last tenant loaded all your copper pipes and wires into their U-Haul when they left? You still getting 2%?

    I'm not interested in "snapshots" of ideal situations, and these low-income, low-value properties are rarely ideal. Sure, I may get a little north of 1% in my market, but it's STEADY (solid blue & white collar tenants with stable incomes/jobs). And besides, I'm in this game for the upside, not the monthly rental scratch. Let's all meet back here in 10 years and compare total returns. :idea:

    3Reply
  • Jonathan Sher
    Saint Louis, MO · Member since 2009 · 168 posts · 40 votes
    14y

    I have a 3b/1b 1000 sq ft house with a 1 car garage rented for $825 a month. Bought for 29,500 all in at $33.5K. Not in a war zone, but not in beverly hills either. I have no issue being in the neighborhood to do maintenance or collect rent. Tenant is a hardworking single mom with two kids, pays rent with no issues.

    1Reply
  • Joey Budka
    Real Estate Investor · Santa Cruz, CA · Member since 2009 · 267 posts · 73 votes
    14y

    From personal experience as an out of state investor, I'd say investing in cheaper properties ($50k>), and getting rents in excess of $900/month in undesirable neighborhoods, does not reap the rewards that initially look great on paper.

    However, my perspective comes from being an out of state investor. I know many investors who are wildly successful investing over the long term in cheap properties in undesirable neighborhoods. These guys understand crime rates, unemployment rates, and demographics better than your average Joe investor. They use this to their advantage, along with an experienced team of contractors to find properties for less than $20k, spend no more than $10k in repairs, and easily rent them out for $900/month or more.

    1Reply
  • Kyle K.
    Real Estate Investor · Chicago, IL · Member since 2008 · 122 posts · 46 votes
    14y
    Originally posted by Nathan Emmert:

    Overly simplistic view in my opinion, sorry.

    What can I do with cash? Buy more property. Cash is real, cash buys. What does your equity growth do? Absolutely nothing. You can't necessarily leverage it as you aren't sure you can get it out, you're at the mercy of banks and interest rates.

    As for properties... buy something now and wait 30 years. What's the problem with a new home today in 30 years... well, it's 30 years old. Instead, buy a 90 year old home today. In 30 years it's 120 years old... heck, it was already 90 years old and going strong, what's another 30 years!

    Let's be real. You're gonna use that $600/month cash flow to buy more property? Even if you bought another $50K property, its gonna take you 7 years of saving that extra cash flow to buy more property. And you've still got an ancient property in a crappy area.

    What's the equity doing? It is simply growing. Month after month, the tenant is paying down my mortgage at an increasingly progressive rate.

    As for my new property 30 years down the line, who says I'm gonna hold the property 30 years? It may make sense to sell the property in 10 years and use the gains to buy 3 new properties in a better market. I don't know if that will be the case, but nobody else does either. Who knows what the future holds? This I do know: it will be much easier for me to unload my nice newer property than your ever-older property in an area that has doubtfully gotten any better.

    I agree with Mitch: "And besides, I'm in this game for the upside, not the monthly rental scratch. Let's all meet back here in 10 years and compare total returns." Like I said earlier, you really gonna buy a bunch more property with that monthly rental scratch?

    1Reply
  • Account Closed
    Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    Purchase Price to rent is one of several filters you can apply when looking for potential properties. Location of the property is should be considered unless your good with neighborhoods that you have to pack a gun, neighborhoods that jobs are fleeing from or possible population is declining.

    I think it is far more important to decide why you are investing in RE to begin with. Are you looking for immediate cash flow primarily or is ultimate retirement more important.

    Oversimplifying your purchasing decision using ratios and other numeric data can lead to some poor purchase choices IMHO. Cash flow is important but is hardly the only consideration when I look at a property. There are many considerations that I look at that would be hard to put an immediate number to. I look at the community as a whole to determine the common bldg sizes, configurations, materials used. I look at zoning. I pay close attention to lot sizes and the topography of the lot has fill dirt been used and to what extent.

    If I can't put boots on the ground, I sure as hell want to partner up with someone that I can trust in the area to understand the market.

    My opinion is only mine based on what I'm looking to accomplish in the next 20 years or so. Use the rules of thumb as guides that help you reach your goals rather than stumbling blocks and failing to consider where you are headed.

    2Reply
  • Ryan B.
    Investor · -, IL · Member since 2010 · 409 posts · 616 votes
    14y

    Kyle,

    I see both sides of the cashflow vs appreciation play, that is why I try to do a little of each. There is a large amount of money in blue coller neighborhoods, you just have to know how to extract it :) In my area though, the low income rentals sell a lot quicker than the newer rentals in great neighborhoods.

    0Reply
  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y
    Originally posted by Kyle Koller:
    Originally posted by Nathan Emmert:

    Let's be real. You're gonna use that $600/month cash flow to buy more property? Even if you bought another $50K property, its gonna take you 7 years of saving that extra cash flow to buy more property. And you've still got an ancient property in a crappy area.

    I think this statement is too simple. How did the first property get paid for? Did it buy itself?

    So, there are different investment strategies. I have seen ghettos gentified and now the elite neighborhoods. It was a bunch of ancient crap and how it's everybody has it bad for those hardwood floors. I've seen new neighborhoods turn into largely section 8 neighborhoods in 10 years or less. I've seen the exact opposite occur in different areas for one reason or another.

    Why not do a little of both (cash flow and appreciation investing)? Personally, I like to concentrate on good structurally sound houses that will cashflow. My thought, or hope, is that if the area is composed of good construction and a good location (by location I mean proximity to down town or some other place people need to be at-not locations as in "this is a nice neighborhood")then property prices will at least keep pace with inflation and probably do better if the area is currently depressed (undervalued).

    I am not going to wait for the profits from my first house to buy my next house. I will apply that profit with my paycheck and get the second house faster than I did the first. And then add paycheck to the 1st and 2nd to get the third. Once I have about 5 houses, if I have invested correctly, those houses should buy, or at least make big down payments, on the rest of my houses every year or two thereafter.

    If we comnpare net worth (or better yet, cash in the bank) at the end of 30 years and I have $2 million and you have $3 million, so what? We've both done good doing it our own way - the way that we wanted to do it - as our own boss - not cow towing to other people's opinions.

    1Reply
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