Real Estate Investor · St. Louis, MO · Member since 2008 · 47 posts · 0 votes
In looking at rental properties with a realtor, he mentioned the rule of thumb of looking for something with gross rents of at least 1% of the purchase price. What are your thoughts on this? Do you use this rule? If so, how do you use it?
This seems like an overly simple analysis. Don't you need the expenses, etc. to figure out if the deal is good. I can easily see situations where the rent meets the 1% criteria, but expenses cause negative cash flow or the cost of borrowing ruins the profitabiliy. Maybe the rule is used as screening criteria to help determine if you want to do any further investigation?
Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes
20y
"Magic Rental Formulas" are common with investors for sifting through the hay stack to find the needle, but an experienced investor is still going to crunch an actual income expense statement on the property before they put it under contract.
Now the 1% rule of thumb completely depends on your market. In my market my number is 2% or a monthly gross rent multiplier (GRM) of 50. A monthly gross rent multiplier allows easy computation of general price from rents. Rents minus utilities multiplied by 50 should be my highest purchase price. A 1% or 100 monthly gross rent multiplier are a dime a dozen in my market. When you crunch an income/expense statement, including maintenance and vacancy, you most likely won't even be cash flowing (depending on insurance and taxes) on a 100 monthly GRM. If I remember correctly I think a 90 monthly gross rent multiplier (7.5 annual GRM) is the highest you can realistically go to cash flow.
Realtors are NOT investors. Be careful when you are trusting a non-investor with investment advice. Determine your magic numbers on your own and then take them to a realtor. Unless you are in a HIGH appreciating area then a non-cash flowing property is not a good investment startegy.
Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes
20y
"Magic Rental Formulas" are common with investors for sifting through the hay stack to find the needle, but an experienced investor is still going to crunch an actual income expense statement on the property before they put it under contract.
Now the 1% rule of thumb completely depends on your market. In my market my number is 2% or a monthly gross rent multiplier (GRM) of 50. A monthly gross rent multiplier allows easy computation of general price from rents. Rents minus utilities multiplied by 50 should be my highest purchase price. A 1% or 100 monthly gross rent multiplier are a dime a dozen in my market. When you crunch an income/expense statement, including maintenance and vacancy, you most likely won't even be cash flowing (depending on insurance and taxes) on a 100 monthly GRM. If I remember correctly I think a 90 monthly gross rent multiplier (7.5 annual GRM) is the highest you can realistically go to cash flow.
Realtors are NOT investors. Be careful when you are trusting a non-investor with investment advice. Determine your magic numbers on your own and then take them to a realtor. Unless you are in a HIGH appreciating area then a non-cash flowing property is not a good investment startegy.
Real Estate Investor · St. Louis, MO · Member since 2008 · 47 posts · 0 votes
19y
This guy is an investor as well as a realtor. He's given me some pretty good advice, but the 1% rule seemed too easy. That's why I was wondering if it is used, as you said, to sift through possibilities before crunching the actual numbers. Thanks for the reply.
1% seems scary to me. I'm with Ryan in that if my investors can't make about 2%, it's not going to cash flow. I don't know how that changes from area to area, because your mortgage will negate any cash flow that may be there after you add the expenses to it if you're buying that high.
I'm a realtor and would highly suggest not trusting almost every realtor/investor I've ever met. MOST of them, not all of them, will do anything to get a sale.
I can't speak for the guy you're talking with in any way, shape or form, but can't see the numbers working.
Ya it makes some sense. What he means is if your per unit cost is say $50,000, then that apartment must rent for at least $500 dollars gross per month. Ideally though you should be trying to get like 1.5% or 2% that way you know you're into profit not break even cash flow. but don't go with "rules of thumb". Only use those at first to get a feel for whether a deal is worth spending soem more time with. Then you have to crunch the actual numbers and find out exactly how much you'd be making.
Investor · Cary, NC · Member since 2008 · 78 posts · 14 votes
19y
So you guys really get 1000 $ in rent for a 50,000$ unit? Wow. In my neck of the woods, we'd be lucky to get 500$! I know some units that cost 150K and rent for 900/mo- not mine:-) Thats worse than the rule of 1%. :crying:
Can you folks share where you are located to be able to make that kind of money from rental? Maybe we should pack up and move to your part of the woods :lol:
Real Estate Investor · St. Louis, MO · Member since 2008 · 47 posts · 0 votes
19y
Originally posted by "rye":
So you guys really get 1000 $ in rent for a 50,000$ unit? Wow. In my neck of the woods, we'd be lucky to get 500$! I know some units that cost 150K and rent for 900/mo- not mine:-) Thats worse than the rule of 1%. :crying:
Can you folks share where you are located to be able to make that kind of money from rental? Maybe we should pack up and move to your part of the woods :lol:
I was pretty amazed with the numbers too, but chalked it up to regional differences in property values vs. rents. I'd say my area is closer to 1% than 2%.
Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes
19y
I live in Amarillo, Texas, and the market here for rentals is still very strong. We have had an annual 5% appreciation over the last couple years while other markets have had 20% or 30% appreciation rates (some markets are quite a bit more). I see quite a few California investors coming into my market buying property at 1% and thinking they can hold it for a couple years and resell for a profit. Not likely. Buying in their market for 1% might be a good deal, but for my market it's a joke. Nobody buys here for 1% . . . except California guys, lol.
I don't factor appreciation into any my deals. It's a no factor. That's the trade off for cash flow.
Let me say this, too. Until I got experienced at looking for deals I wasn't sure how many deals I could find at 2%. I had local people (mostly realtors) laugh at me for thinking I could find deals like that, but I found them. And now I find atleast one a week, but I specialize in finding discounted property. That's why I am wholesaler. :D
Richardson, TX · Member since 2008 · 47 posts · 0 votes
19y
Hi All,
I'm very new at this so be kind. I have been doing as much homework as possable so sorry if the question is a little disjointed.
I'm looking in the Dallas/Plano area and it seems 1% is about where its at but the appreciation dosen't jive. What sold in 2001 for 175,000 is now selling for 230,000 to 250,000 for a duplex in a decent area. Above even 7%. Seems this should suck my equity for the next year if the index stays at 7%.
Am I missing something in my math?
No doubt these are retail prices. So at the risk of sounding dumb.
How do I go about finding the discounted property. Or do I just make an offer based on my projected first year cash flow?
Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes
19y
Rental returns are always highest on lower end property. Buying in middle or higher income areas in any market will always bring lower returns on rentals. Its a trade off. You can get better tenants and less headaches with higher end properties, but you will be sacrificing ROI. If you are looking for the most return, then look at areas that average 30-50% of the average priced house in your market.
Understand also that it takes a thorough and diligent effort to find the better deals in any area, but they are out there.
Richardson, TX · Member since 2008 · 47 posts · 0 votes
19y
Thanks Ryan
So would 1% be a good factor for the mid to high property?
So here is another one if it is not too off subject.
So I just get an email from my realtor saying this property we were looking at for the past week and has been on the market for a month all of a sudden has multiple offers after I questioned the price of the Duplex. And I have until end of day to submit mine. Gut feeling? Don't think there are any.
Ryan,
Care to share any tips on where you look for your deals?
I live in a very expensive are, and getting 1% is challenging, much less 1.5 -2%. I am a realtor, have 1 rental & would like more.I check MRIS every day, but have a feeling that's not where the really good deals are.
Plano is holding its values pretty nice, but hasn't seen
a heck of a lot of appreciation -- not when comparing
it to California. There has been appreciation, but not
anywhere close to California.
If you buy a house for $280,000 and want $2,800 a month
in rent, and someone can afford it, then they can afford a
mortgage to buy their own home. Think?
But a home like that is in the middle range, like Ryan said.
A million dollar home you could rent for $2,800 but then you
would be getting way less than 1%.
Richardson, TX · Member since 2008 · 47 posts · 0 votes
19y
Thanks for your imput westly.
I don't expect anything to be like California. That was a weird ride.
All I want is some income property that is not going to bury me for the next two years and since my family lives in Plano, figure it would be a good start.
I was actually leaning towards multi-family anyway. They seem to be in that range.
Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes
19y
Multidwellings are the best I have found for ROI for rentals. Now of course, there is a trade off. Multidwellings are more commonly going to have transient tenants and therefore more vacancy issues. You also have to deal with inter-complex tenant conflicts. But if you can deal with the headaches you will make a better return than on single family houses.
Finding deals is a business in itself. I would recommend getting involved with your REI club and networking with some wholesalers. If all you are looking for is ready to go rental property (no rehabs) then different types of marketing may not give you the return you are looking for. If you are willing to do some work to get a cheap price then I would recommend to start building a marketing campaign for finding properties.
Because rents have not caught up with many market's appreciation rates, residential rental property might not be a good investment strategy in some areas. If that is the case and you are still wanting rentals, I would expand my search to outlining areas. Obviously the closer you are to the property the better you can manage it, but you may have to sacrifice some of your income for a property manager in a distant market.
Richardson, TX · Member since 2008 · 47 posts · 0 votes
19y
Ryan, you have answered a great deal of my questions in your last response. Thank you.
It gives me a good direction to head and has confirmed a few other points.
I guess the point is you find a "rule of thumb" that works for you and you use it to screen out all of the totally unacceptable properties, not to make a final decision.
My rule of thumb is based on probable cash flow. I know what rents are in my neck of the woods so I use that as a guess, and I just assume that expenses are 35% of gross income.
I wrote a little program for my Pocket PC where I just punch in my assumptions about the loan and operations and it it spits out what my cash flow would be. If cash flow is positive, or close to positive I call the lister or owner to get real numbers.
Dayton, OH · Member since 2008 · 517 posts · 17 votes
19y
Originally posted by "larrylund":
No where near the 1% rule. I would love to be able to get that kind of rent but just don't see it here.
I just buy and hold, what is one ot do :)
What are appreciation rates in your area? If the appreciation is outstanding then you might be able to sacrifice cash flow for price. If appreciation is moderate or low then those are terrible prices!
Look, appraisals don't mean squat when I'm buying a RENTAL property. Appraisals matter if I'm going to REHAB, but if I want to rent the property then just tell me what the rent is and I'LL decide what the price should be.
Residential Real Estate Broker · Tigard, OR · Member since 2008 · 10 posts · 0 votes
19y
Originally posted by "juzamjedi":
Originally posted by "larrylund":
No where near the 1% rule. I would love to be able to get that kind of rent but just don't see it here.
I just buy and hold, what is one ot do :)
What are appreciation rates in your area? If the appreciation is outstanding then you might be able to sacrifice cash flow for price. If appreciation is moderate or low then those are terrible prices!
Look, appraisals don't mean squat when I'm buying a RENTAL property. Appraisals matter if I'm going to REHAB, but if I want to rent the property then just tell me what the rent is and I'LL decide what the price should be.
Hi juzamjedi, in this area, it has been averaging about 14-15%
Dayton, OH · Member since 2008 · 517 posts · 17 votes
19y
Yes that's good appreciation. In that case I would sell the one you already have for 1.5 times what you paid for it. If you've held for 3 years and you have 14-15% appreciation then you should be able to get that much out of it. If that's really how much you can get then I'd say your strategy to buy and hold in your area will work great!
Residential Real Estate Broker · Tigard, OR · Member since 2008 · 10 posts · 0 votes
19y
Originally posted by "juzamjedi":
Yes that's good appreciation. In that case I would sell the one you already have for 1.5 times what you paid for it. If you've held for 3 years and you have 14-15% appreciation then you should be able to get that much out of it. If that's really how much you can get then I'd say your strategy to buy and hold in your area will work great!
Thanks. yea I kind of thought maybe and yes that is what is going on in this area and has for some time. Just goes to show a shoe doesn't fit all sizes :)