Costs to rent received ratio?

Question

I am going to have to review the book What every REI needs to know about cash flow, but for now I would like to know what ratio you all use to determine costs verses potential rent received.  As you work on a house and you see the expenses going up and up at what point do you say this is not going to work?  What is the correct ratio and what numbers do you all accept?  Thank you in advance

Mark Forest · Answer

Bill, I am still trying to understand what you are disagreeing with here.  Do you not like the 2% rule?  Why?  Help me understand.  Thank you.

Mark Forest · Answer

I would love to have the luxury to do that.   Usually bids have to be submitted at the end of business the next day.  Such an inspection for all the houses I look at would costs thousands.

Hai Loc · Answer

I only use 3 main ratios to decide if I would even consider the property

1) Gross Rent Multiplier

2) Cap rate (even with singles)

3) Cash on Cash

Chris K. · Answer

It definitely should include rehab costs

Mark Forest · Answer

So this does NOT include rehab costs?

Take a look at projections over the period you'll own the property and decide what's a winner or loser from there.

I had a property with very expensive sewer line costs.  I could never had predicted that.

Mark Forest · Answer

I got the 2% rule from here at Bigger Pockets.  Is that what you disagree with?  What is ARV?

I am capitalizing the house costs, but I am just wondering if there is a point where I realize I have bought a looser.  You are right that I will have little choice but to finish it. I have bought a couple of houses that unseen expenses have hurt me

Bill Gulley · Answer

1st, you need that idea ahead of time.

What guru thought this ratio up? Expenses are an income statement item, repairs go to the assets of the balance sheet and capitalized. You're mixing apples and oranges for a fruit salad. Never heard of it, used it and just what is it suppose to tell you.......nothing as any answer as to a break even is a guess. Run a break even analysis, not hard and it's it's not a ratio.

Look at the ARV and costs estimates, add your fluff for overruns, then look at market rents and vacancies, etc.....will it work? If you get so deep in a project you have little choice but to finish it unless there is some dummy you can flip it to. Regardless, your return may not be as high but you should still be able to cover the expenses in time.

Sounds like someone made up some stuff to fill pages of a book to sell to me.  :)

Mark Forest · Answer

I guess the 2% rule would be applicable here.  Once 2% of the repair bills plus the cost of the property exceed possible rents it is time to reconsider going forward.