Do you have to essentially steal a property to make #s work?

Minneapolis, MN · Member since 2017 · 7 posts · 2 votes

I've been trying to purchase a rental property for the better part of a year now. It just seems like anything available on the market never works when I really look at the numbers.

Here's an example of a current place available in my area:

140k asking price

$1,485/mo in rent

Looks to be a solid place, needs a little cleaning but otherwise it's pretty standard. If I go by the 50% rule for a rough estimate of offer price, I would need to offer them ~90k to get this place. Every place I look at runs into this problem where asking price is nowhere near where I think the numbers can work, but people buy them regardless. Is everyone else making bad investment choices or am I just being too conservative?

I've been trying to work with a realtor to get places before they hit the market but the only things I ever see are basically junk. Is this just an insider's game while I'm on the outside?

0 Reply

83 views

Most Popular Reply

David Zheng

Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes

Look at it this way:

you get lucky and bring it down to $135,000
20% down with a 4.75% 30 year, you get a mortgage of $563
Taxes, lets say $200/month (which I think is high)
Insurance is $125
10% CAPEX= 148.5
5% Vacancy= 74.25

10% Manager= 148.5

Total Monthly Expense= 1259.25
You net $225/month

I know some people who are happy with $100/door.
For a first deal, it might not be a bad one.

5 Reply

See this reply in the discussion

37 Replies

Jump to latestLatest

Sort by

David Zheng
Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
9y
Look at it this way:

you get lucky and bring it down to $135,000
20% down with a 4.75% 30 year, you get a mortgage of $563
Taxes, lets say $200/month (which I think is high)
Insurance is $125
10% CAPEX= 148.5
5% Vacancy= 74.25
10% Manager= 148.5

Total Monthly Expense= 1259.25
You net $225/month

I know some people who are happy with $100/door.
For a first deal, it might not be a bad one.
5 Reply
Christopher Blanco
Real Estate Consultant · Cleveland, OH · Member since 2016 · 511 posts · 345 votes
9y
@David Zheng, you also forgot the water bill if its a duplex, property maintenance (trash, lawn, snow) etc. I am with @Jeremy Chaser its getting hard to find deals.
1 Reply
Matt Faix
Investor · Carnegie, PA · Member since 2014 · 259 posts · 144 votes
9y
@Jeremy Chaser It sounds like there are other options that you may not have tried yet when it comes to your search. There are a lot of other ways to find properties other than through your realtor or the MLS. Have you tried any direct mail marketing, talking to wholesalers, networking events, checking public records for foreclosures, or even calling 'For Rent' signs and asking if they'd want to sell? You'll be surprised with how many potential deals you can find these ways, and the numbers will typically work out better compared to what you see on the MLS.
2 Reply
David Zheng
Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
9y
@Christopher Blanco

Ahh yes that is correct. Based on some of my own utilities for 5-6 bedroom houses, sewer, water, and trash generally come out to about 120 a month.

You may just barely hit the $100/door mark. Which again isn't what I would do for sure, but maybe something to get your feet wet with.
0 Reply
Levi T.Pro Member
Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
9y
Originally posted by @Jeremy Chaser:
I've been trying to purchase a rental property for the better part of a year now. It just seems like anything available on the market never works when I really look at the numbers.
Here's an example of a current place available in my area:
140k asking price
$1,485/mo in rent
Looks to be a solid place, needs a little cleaning but otherwise it's pretty standard. If I go by the 50% rule for a rough estimate of offer price, I would need to offer them ~90k to get this place. Every place I look at runs into this problem where asking price is nowhere near where I think the numbers can work, but people buy them regardless. Is everyone else making bad investment choices or am I just being too conservative?
I've been trying to work with a realtor to get places before they hit the market but the only things I ever see are basically junk. Is this just an insider's game while I'm on the outside?
Assuming this is a SFH, you need a strike price between 111k - 133k. Lower is better, but I would not step across the 133k price point ever.

Anything on MLS is set to market price based on the condition of the property etc, you will always pay top dollar for these deals, which IMO is overpaying, because people are willing to bid things up a little over value and worry about the ROI later, or not at all because they just want to make a deal after years of searching, or want to live in it. So you have to find a property that is likely not so nice, and buy it for a "AS-IS" price, then make improvements and enjoy the reward.

Curb appeal drives rental pricing; If an neighborhood rents for $1,400 normally, and you find a rundown home renting for $950. 9 out of 10 times, its renting cheap because the LL wont improve the property, and likely has non performing tenants in it... so you buy at a cashflow price on the $950 minus repairs, then rehab and rent it for $1,400.
2 Reply
Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
9y
$140k with $1485 in rent seems pretty solid to me as long as its not in a war zone. My typical property is $400-$450k and rents for $2500-$2800.
[email protected]301-893-4635 Podcast Guest on Show #192
District Invest Group545 Reviews
Website View Page
3 Reply
Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
In my area, I'm finding properties for $350 renting for $1800.
[email protected]Podcast Guest on Show #261
2 Reply
Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
9y
It's probably that they are buying "junk", not because they are meaning to but because most people have absolutely no idea what numbers to run on a rental property to determine whether it's worth it or not.
It's probably just the areas you are looking in. The best or nicest areas likely won't cash flow. You're in Minnesota though so you should be able to find plenty of properties that cash flow in different areas in the state.
Also, most realtors don't know how to help investors. Finding an investor-friendly agent is key in helping you. Also keeping in mind, most of the best listings never hit the market.
I would do some searching via the BP forums asking for investors near your area and find out from them where they are buying, what results they are seeing, maybe recommendations for who to work with, etc.
2 Reply
Tim Puffer
Lansing, MI · Member since 2015 · 301 posts · 149 votes
9y
@Jeremy Chaser - You need to look for off market deals in my experience to get the cashflow you're looking for. Go driving around the neighborhood and find some places that you're interested in and hand write a few letters to them to get you started. That's how I got my current house hack duplex.
I second what @Ali Boone said in that most realtors have NO idea how to properly underwrite an investment property. They will just assume that the rent covers the mortgage so it's a great deal... and we all know that isn't the case.
1 Reply
Dan Vleck
Deerwood, MN · Member since 2014 · 184 posts · 122 votes
9y
Don't forget to check websites of Fannie Mae, Freddie Mac, Auction.com, Craigslist and forsalebyowner.com for deals.
1 Reply
Javier Sanmiguel
St Paul, MN · Member since 2016 · 38 posts · 12 votes
9y
Hi Jeremy, I know what you mean. The Minneapolis market is hot right now. Even "bad" properties are selling high and fast. I'd agree with everyone else on searching for off market deals. Just stick to the numbers and remember this is a long term play.
1 Reply
Amber Gonion
Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes
9y
We are advising our clients to send us their pre-approval letter ahead of time and be ready to look at properties on short notice. Many are gone within 24 hours of being listed right now. The are deals out there, but you need to be fast, know your numbers and be willing to jump right to your best offer right away.
1 Reply
JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y
OK:
1. First off - asking price is meaningless except as a barometer of whether or not you might be able to do business with the seller and whether or not you have the financial ability to close on a house (ie if you can't come up with $200k you wouldn't be looking in that rough price range). Otherwise, the only numbers that matter to you are: the FMV of the house in its present condition; the FMV of the house after any repair/rehab; the FMV of the property as a rental. Percentages are meaningless without context, and become less meaningful the more the property is worth.
2. When I am doing a quick eval of a property, my first question is "Will this unit rent for at least 1% of my all-in (purchase price+rehab, regardless of whether it is cash or finance)?" Again, this may not be effective when you start to get into higher ranges - see @Russell Brazil's point on $400k homes - but I have found this to be a good, quick, dirty test at anything sub $200k. If it will not rent for that, and I don't see some very strong evidence for other considerations - significant property value appreciation, redevelopment, commercial rezoning, etc - then I pass. If it will rent at 1% or better, it almost always is worth consideration as a rental.
3. I never "steal" a property. I pay what the property is worth to me, in its present condition. The seller agrees to that value, or else we wouldn't have a deal. Learn how to property value the property, and you will have much better success than trying to work off of hypothetical percentages as to what to offer the seller. If a property is overpriced, learn how to demonstrate to the seller that the property is overpriced, and you won't ever be "stealing" anything :)
Podcast Guest on Show #243
Skyline Properties
View Page
2 Reply
Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
9y
@Mindy Jensen you buy properties for $350.00??? You should write a book! lol
[email protected]512-888-9122
The Moorhead Team5140 Reviews
Website View Page
1 Reply
Jassem A.
Investor · PA · Member since 2013 · 1k+ posts · 602 votes
9y
1485/mo for 140k is only a little better than 1%. If you really like the house and neighborhood and expect no problems from tenants then it might be a good place to park money. There are places where 2% or better is possible and the neighborhood and schools are still good but they will most likely need a little work and are usually bank owned properties.
1 Reply
Bruce Runn
Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
9y
@Jordan Moorhead
that is a funny interpretation-LOL
1 Reply
Bruce Runn
Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
9y
@Jeremy Chaser
Hey Jeremy,
Don't give up, there are cash flow properties in Minneapolis.
It sounds you may be talking about SFH versus a duplex and I'll just say I can't make a SFH cash flow but all of my duplex's do. I close on my second purchase this year in 10 days and both properties were MLS listed. Both duplexes cash flow over $1,000/month so it might be how you look at the deals. You can't get a real calculation without having been in the properties to see if the rent is too low, if the listing was done correctly, if there is opportunity to add bedrooms, ect. so keep getting into the properties with a realtor. These are all tactics that most people utilize. My guess is you might not be running your numbers correctly if you see a lot of other investors buying properties that you think are losers. Connect with me and I'll walk you through a scenario if that helps.
3 Reply
Account Closed
Investor · Excelsior, MN · Member since 2017 · 85 posts · 37 votes
9y
I agree with @Bruce Runn that there are money makers out there. It all depends on what you have set as your minimum cash flow per month. I'm seeing a lot of duplexes with 2/1 set ups going for 130/140k per unit and that would make the numbers tight. Some people are ok with a hundred cash flow a month and maybe those are the properties that you are seeing fly off the market. However, every couple weeks there are properties popping up on MLS in the 110k/unit range (I actually closed on one today below that). There is definitely some money to be made there in my mind.
Just keep looking and be ready to pounce when one pops up.
0 Reply
John Woodrich
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
9y
It sounds like you have come to realize that the 50% rule and 2% rules do not always work in every area. Especially now considering inventory is down and prices are up.
Most of my deals have been MLS properties, most were bank owned, and all have been purchased needing repairs of some sort. If the house is move in ready you are going to compete directly with first time homebuyers which makes the properties more competitive.
If you have a target area I would look for properties for sale everyday if you don't have a realtor kicking you data. There are many deals which are listed and sell in the first day or two that you may miss if you are not active in the market.
Lastly, if you aren't finding deals you may need to change your criteria (50% rule) and look at real numbers. If a property is in decent shape it won't require significant repair or expense to maintain it. You could also consider investing in a different area.
0 Reply
Todd Douglas
Realtor · Detroit, MI · Member since 2017 · 184 posts · 33 votes
9y
I think off market deals are better personally. My company actually holds properties or direct with the seller of properties in several markets in the country.
0 Reply
Dan Bryskin
Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes
9y
@Jeremy Chaser
I think it is a bit naive to think deals are found. Imagine somebody places a perfect deal on MLS, what would happen next? Right, multiple offers and it goes way over asking price. Not much of the deal after all. One day you will list perfect deals on Thursday, so you get multiples by Monday :) Think about it this way: if all you got is a loan you are a retail investor. Your are competing with owner occupants. In most cases property is worth more to them then to you, you loose. If you got cash and willing to take properties not finance-able in the current state, owner occupants are out. Your competition is less. Don't have cash but got balls? Hard money. Want to reduce your competition further - take on rehabs sane people will run away from. All you got is a loan and you can't find deals? Find people who can find or make deals. Your loan is a nice long term financing, and it may be of value to somebody else ... So what do you do? Find partner(s) or make deals. Can you buy something and add another bedroom or two? Can you handle construction? Look for properties people run away from. Or may be you are looking at it wrong. Wrong geography, wrong approach, wrong mindset? Are you renting? May be buy a primary residence and rent all rooms out. Or buy one, finish a basement and have a tenant pay all or most of your mortgage. Got a house? Trade it for a duplex or something ... Network ... Oh, and don't look for a perfect deal for your fist one. Be realistic. It will not end up the way you think it will. Don't look at what you are going to make, make sure you are not going to loose a lot, and move forward, experience and persistence will pay in the long run. What it boils down to - study, work the market and pay with time, cash, sweat and tears for experience or partner with somebody and take less for possibly more predictable outcome. My last 2 cents. Want to vent? Get married, just choose your suppose well, kind like a deal :) Want a usefully advice? Be specific. Least you can do is share ... Sorry man, too tired for Minnesota nice :) Good luck.
2 Reply
Franchesca Ramaker
Minneapolis, MN · Member since 2015 · 13 posts · 3 votes
9y
I'm also looking to buy property in the Minneapolis area and feel like everything is too expensive right now to make the numbers work. However, this thread had great responses that will help with evaluating future deals. I'm in the same boat, so, good luck!
0 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
The '50% rule' references expenses, not offering price. Most properties, with a hands-off LL, PM in place, over time, will cost about 50% of gross rents on average.
I would be all over a 1%er in my area. Haven't seen $145k that rents for $1450 since 2003.
But this is all area specific. I will also see appreciation and good schools. A war zone here means a neighbor with a dog that barks sometimes.
MidWest areas may be 2% producers, but I will put my IRR against theirs any day of the week. Selling some houses this year I bought 10 years ago for 60-80+% more than I paid.
IRR is what you need. If your example is a solid asset in a good area, I'd be all over it @Jeremy Chaser
3 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y
@Jeremy Chaser
The best advice I can offer someone for their first rental property is to focus on an OK deal, but don't spend years chasing the best deal. Real estate investing is more about action than anything. If you buy in a good area, rents and property value will increase over time.
Many people got into rentals a few years ago when the market took a dump. They got incredible deals with no effort. Many of them think they are investing geniuses, but it was mostly lucky timing. The rules you hear about (50%, 1%, 2%) are not applicable today in most markets. You have two choices, either pay the current price or wait for the next market crash.
Good luck!
4 Reply
Bruce Runn
Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
9y
@Joe Splitrock
I laugh when people think the people that started buying when the market took a deep down turn, were lucky. If they bought when the market was sinking like me- they were out on a limb because no one was buying - my friends were screaming I was crazy but I just focused on cash flow and didn't worry whether the market would go down further or if I'd go under water because I was making ok money with the rent. Now, after several years, the rents continued to go up so I make very good returns but not everything was a slam dunk even then. Most people don't remember how bad it was- builders were going out of business, realtors quit the business because hardly anything was selling, people were losing their jobs ect. A lot of people were losing their places to foreclosure or just trying to get out of under water mortgages and those willing to take a BIG risk started buying. That is not called luck because people took the financial risk and bought anyway, it's only now when the values have jumped up that people look back it looks like a great idea to everyone else. Hind sight is 20/20 because it worked out. Where was everyone when everything was a low price and going lower? People had to put their money on the line to buy back then and banks didn't want to lend to you. It was a big gamble because there was no guarantee the market was going back up in the short or long run. If the economy didn't turn around, values could have languished or gone down even further so its easy to say, it was a no brainer back then but it wasn't. The problems is everyone wants something easy without work, effort, risk as @Dan Bryskin wrote and he's right. You have to slog it out with a lot of people now because everyone thinks this is an easy business and deals should be easy to find.
I'm still a believer in buying more properties but I caution that you always have to evaluate if we are approaching the high point in the market because continued increase in values is not guaranteed for the next 3-5 years. I only advise to buy if the cash flow is very good and never plan or incorporate appreciation into profit equations so my motto is patience then pounce as you have to be ready and move very fast when you uncover the one you want.
4 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.