Rental Property Investment analysis

[Mike Henson]

I am just beginning my research into investing in rental properties as a way to augment  retirement income and have a few (hopefully) simple questions as follows:

1. Generally, when stating a "per door" income, what are you deducting from the rent to come up with this number?

2. The "2% Rule" says that per month rent should be equal to 2% of the sale price.  Is this legitimately attainable or an exception to the norm?  When I find a property that meets that criteria it is almost always in a (fairly) depressed area.  However, I wonder if a property meets the 2% rule, is it always (or almost always) a good investment given the goal of passive income?

3. Are capitalization rates subjective assessments or pure math (NOI/sale price)? Should the cap rate be a part of my analysis and if so, how is the best way to think about it in my market in metro-St. Louis, in Madison County Illinois?

Any help is greatly appreciated.  Thanks in advance!

Mike

[Ali Boone]

Hey Mike! My answers are:

1. Generally, when stating a "per door" income, what are you deducting from the rent to come up with this number?

Taxes, insurance, property management (if app), HOA (if app), mortgage (if app), vacancy estimate and repairs estimate. This can help-

http://www.biggerpockets.com/renewsblog/2013/01/19...

2. The "2% Rule" says that per month rent should be equal to 2% of the sale price. Is this legitimately attainable or an exception to the norm? When I find a property that meets that criteria it is almost always in a (fairly) depressed area. However, I wonder if a property meets the 2% rule, is it always (or almost always) a good investment given the goal of passive income?

No, it's not always good. The 2% is only a guideline and shouldn't be used to determine the worth of a property. Not every 2% property will be a good investment, and lots of non-2% properties are great investments. Use actual numbers instead of estimates, and you'll be much better off. Plus the days of 2% are kind of gone now (except, exactly as you say, in depressed areas). Here's more-

http://www.biggerpockets.com/renewsblog/2013/04/14...

3. Are capitalization rates subjective assessments or pure math (NOI/sale price)? Should the cap rate be a part of my analysis and if so, how is the best way to think about it in my market in metro-St. Louis, in Madison County Illinois?

I use them all the time to assess how well-valued the purchase price of a property I'm looking at is. If a market generally has properties at a 10% cap rate, and one I'm looking at only gives a 7%, I'm going to either bargain on down or keep moving. So it's more like a just understanding going-rates, if you will. They should be pure math assessments, but they do become subjective because people include, or exclude, various variables (unfortunately)