At least double or nothing

2 Replies

I was given a piece of advice that really makes sense to me but I thought I would get some other opinions on the idea.

The advice is that if you are going to buy any form of real estate to rent out you should, at the bare minimum, be getting twice the amount a month in rent than what it costs you to own and operate it or don’t buy it. 

So I guess my question is; is this a good foundation to go by and if not then what would be a good ratio?

@Mitchell Cord Cantrell

Every property and property type are different. It's sort of hard to apply this uniformly across the board.

High expenses can be good too. When you find excessive expenses, you might have found a big opportunity to increase the value of the building. Look for ways to cut them down to a reasonable amount. Find better property managers, shop repairs around a bit more, split utilities with RUBS, etc, etc.

After you analyze enough deals, you'll get a good feel for it.

@Mitchell Cord Cantrell As with any general rule the answer is it depends. Any property can be cash flow positive with enough money down. So getting twice the amount of rent than what it costs you to own and operate is relative to how much you put down. But lets assume a standard 20% down on an investment property and it's a 100K house.

Mortgage $450 (5.5% rate, 80k mortgage, 30yr fixed)

Taxes $167 ($2,000 annually is what I pay for my rentals in Florida)

Insurance $80 ($1,000 annually again is what I pay)

TOTAL Monthly Expense = $701

TOTAL X2 = $1,402

If you can find a 100K house (that's appraised value is also 100k) that rents for $1,402 that's a big home run. That's not really a thing near me though. For me the 1% rule works best and cash flows positive in my area. The house should rent for 1% of the value of the house. So a 100K house should rent for $1,000 a month. That usually will get you cash flow positive and build up a buffer for any future repairs. So the above mentioned example is still cash flowing $300/month if the rent is $1,000 which is a good return. That's also a 15% cash on cash ROI.

Now there are plenty of ways to get closer to doubling the rent as compared to operating costs but its not easy. You need to buy very under market value houses, or buy then rehab and create a lot more equity than money in. There are probably 10 other ways at least that other people are thinking of to make those numbers happen you said but that's a home run deal and they are few and far between.

If you're only looking for those kind of deals you will potentially never start investing.

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