SFR Investor · Sarasota, FL · Member since 2013 · 12 posts · 0 votes
Hi everyone,
After doing lots of looking around in and around my area, it seems like getting 2%/month for rent is quite ambitious.
As I understand it, the rule/guideline basically suggests that if you spend $100k on a property, you should be getting $2k/month. I'm also assuming that any rehabs are included in the $100k for this valuation.
Are you guys really finding these deals? The problem I'm running into is that the cheaper properties that might get better percentages will require more upkeep (they're a reason they're selling cheap!) So I'm having some trouble believing that 2% is realistic; I'd love to hear what you all think about this.
Also, I'm new to the forum, so if this has been discussed somewhere else feel free to point me in that direction.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
You're applying this (stupid) rule backwards. You start from the rent, which is the thing you have the least control over. So, if rent is $1000, then the most you can pay, according to this rule, is $50,000. If you can't buy the property for $50,000, don't buy it.
There are a bunch of assumptions in the rule. In particular, that the rent is about $500, that you're getting financing for around 6% and that you would like to have $100 in real cash flow if you financed it 100%. If any of those assumptions don't apply, the rule doesn't work. So, with today's lower rates, you can afford to pay more. If the rent is higher, you can afford to pay more.
Now, underlying this rule of thumb is the 50% rule. That says expenses, capital and vacancy will average out to about 50% of the gross scheduled market rent. That's been shown to be correct by a couple of very large datasets for 100,000's of apartments. For any particular property in any particular year, you may do somewhat better or quite a bit worse.
You can also earn a slice of that 50% if you do the management and minor maintenance yourself. New investors often say "boloney", it can't be that high. But it does appear this is a pretty solid rule, whenever anyone has offered up any significant amount of data.
Not the debt service, the P&I part of your payment, is NOT included in the 50%.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
You're applying this (stupid) rule backwards. You start from the rent, which is the thing you have the least control over. So, if rent is $1000, then the most you can pay, according to this rule, is $50,000. If you can't buy the property for $50,000, don't buy it.
There are a bunch of assumptions in the rule. In particular, that the rent is about $500, that you're getting financing for around 6% and that you would like to have $100 in real cash flow if you financed it 100%. If any of those assumptions don't apply, the rule doesn't work. So, with today's lower rates, you can afford to pay more. If the rent is higher, you can afford to pay more.
Now, underlying this rule of thumb is the 50% rule. That says expenses, capital and vacancy will average out to about 50% of the gross scheduled market rent. That's been shown to be correct by a couple of very large datasets for 100,000's of apartments. For any particular property in any particular year, you may do somewhat better or quite a bit worse.
You can also earn a slice of that 50% if you do the management and minor maintenance yourself. New investors often say "boloney", it can't be that high. But it does appear this is a pretty solid rule, whenever anyone has offered up any significant amount of data.
Not the debt service, the P&I part of your payment, is NOT included in the 50%.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
13y
We were seeing a lot of deals in Atlanta that met the 2% rule over the past few years (I recently purchased one where I was all-in for $40K and rents were about $900/month), but these deals have now disappeared now that the market is improving and a lot of institutional investors have entered the market.
Real estate is very local, and what might work in one area isn't necessarily going to work in other areas...
Landlord · Flat Rock, MI · Member since 2011 · 179 posts · 26 votes
13y
Keep in mind that the 2% rule serves as a quick and dirty way to stay out of trouble if you don't have confidence in your taxes, expenses, etc. If you know these things, and can leave yourself a cushion, then you may or may not need that rule.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
Ben Kiekel you've gotten some very good answers especially Jon Holdman's.
Yes you can find rentals @2% I find them at much better number that that right now. If you are expecting to find nice suburban houses that do that in Bryn Mawr you are missing the point. It doesn't make sense to buy rentals there. You are only minutes from Philadelphia and I 'm sure you can buy stuff as cheaply there as in Baltimore
SFR Investor · Sarasota, FL · Member since 2013 · 12 posts · 0 votes
13y
Jon Holdman thanks clearing that up for me. It makes sense that there are lots of variables that might affect whether the deal will be profitable. And that is a great point to start from a realistic rent amount and work backwards to set my upper limit for an offer. I'd actually never thought about it that way.
SFR Investor · Sarasota, FL · Member since 2013 · 12 posts · 0 votes
13y
J Scott and Dawn A. thanks guys! It makes complete sense that this would be dependent of the are and market prices. I am just starting to do research in this area because I haven't lived here for too long, but you're right Ned Carey, I wouldn't expect to find any properties where the numbers make sense in Bryn Mawr.
I'm a little bit intimidated by owning property in right in Philly though, so I'm looking into some of the suburbs a little bit farther out. On the other hand, if the numbers are great for an Philly property that is in decent condition I would keep the it on the table.
In short, thanks for the info everybody! From what I'm hearing, it's possible with some patience to wait for the deals. I'm not in a big hurry to jump in right now so I'll keep this info in mind as I keep researching.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
Originally posted by Ben Kiekel:
J From what I'm hearing, it's possible with some patience to wait for the deals. I'm not in a big hurry . . .
Exactly, but don't wait for the deals you need to start looking - and start now. Only by looking and evaluating deals will you know a real deal when you finally find one. By then you should be ready.
Also most great deals aren't found, they are negotiated.
Investor · Farmington, UT · Member since 2011 · 314 posts · 179 votes
13y
Check out Ali's blog post, it was good. Also read Jeff Brown's stuff. Bottom line, generally the high (12+) cap rates = intense management, low appreciating areas.
Real Estate Agent · Modesto, CA · Member since 2013 · 33 posts · 8 votes
13y
2% monthly return! That's huge. In the best part of the market where I operate 1.5-2% possibly on a SFR. Today you're lucky to get .5% on most places. We've seen huge price increase in the last 12 months though.
Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
13y
I usually target 3-4%. I closed today on a property that after my rehab costs will rent for 5.78% of my total cost (but this one is a duplex). It was a short sale with code enforcement issues with the city that took a lot of hours to resolve over the last few months and a lot of negotiations with the first and second lien holder to get it down to the current price (I guess a contract at 4.7% of the unpaid balance isn't the easiest thing to get them to swallow) so it wasn't just an easy just an easy purchase. There are deals that will bring a good return but they aren't going to be easy to find because if they were somebody would jump on them immediately. It usually takes work (or luck) to make money.
Real Estate Consultant · Brighton, MI · Member since 2013 · 607 posts · 251 votes
13y
We are enjoying very good returns on our SF Michigan rentals.
Purchase price $32K, (3 BD/1BA) our rent is currently $750 and market rent is on an upswing (yaaay!). Our operating costs are merely $330 monthly which includes (property taxes $100, insurance $65, management fee $100) which is only around 44% of the rent. Therefore, our net yearly income comes to $5,040 giving us a net yield of nearly 15%. Hey, I'm not complaining!
Flip and Buy/Hold Investor · Rochester Hills, MI · Member since 2013 · 245 posts · 105 votes
13y
2% is attainable but you usually have to compromise on location and/or tenant. The better locations that attract better tenants will usually cost more and net you a lower return. The cheaper houses in poorer neighborhoods might cost less and show a better return on paper but usually are more problematic to manage. You need to find the spot in the middle where you are comfortable investing. I prefer to lower my return and invest in easier to manage properties in better areas that might also have more appreciation upside.
SFR Investor · Sarasota, FL · Member since 2013 · 12 posts · 0 votes
13y
Ali Boone thanks for that article post; it's pretty much along the lines of what I've been thinking that sometimes what works out on paper might equal headaches, trouble, and extra hours of my time to closely manage the property.
Dawn A., it's great to see those examples. Thanks for sharing them with me. I think it will be a very interesting/challenging ride once I start finding some target properties and negotiating with the sellers.
SFR Investor · Sarasota, FL · Member since 2013 · 12 posts · 0 votes
13y
Originally posted by Jon W.:
You need to find the spot in the middle where you are comfortable investing. I prefer to lower my return and invest in easier to manage properties in better areas that might also have more appreciation upside.
Good thought Jon; at this point I'm more comfortable with properties that aren't (hopefully) going to need as much oversight. Even if the purchase price to rent ratio is great if you end up spending lots of time, effort, and money to manage it then I can see it quickly becoming a problem.
Rental Property Investor · Southfield, MI · Member since 2010 · 111 posts · 20 votes
13y
I'm pretty much getting slightly more than 2% from my SFH's in Detroit. In addition some are section 8 housing where the rents are $750 and the house is $35,000
SFR Investor · Watkinsville, GA · Member since 2011 · 83 posts · 33 votes
13y
As others have said and as Ali Boone great article states, this is very location specific meaning those 2% rule deals are still out there but it may be a really crappy house in a war zone. Where I invest, we have the University Of Georgia so good luck finding those deals here.
I don't take either the 2% rule or 50% rule into account when I look at properties. I buy newer, less than 10 years old, homes that require very little if any rehab. Still have 10 years on the roof with newer mechanicals. If the mechanicals are in rough shape, like HVAC, ill replace them like I did two SFH last year. Brand new indoor and outdoor Trane units with a 10 year parts and labor warranty, new appliances and new water heaters. These are homes that sold for $200,000-$250,000 prior to the market collapse. I get long term tenants and don't concern myself with the "rules".
Bottom line is if the numbers work for what your trying to achieve, then its a good deal for you no matter what the rules state. Every location is different, taxes may be higher or lower than someone's else definition of a good deal. What works for me may not work for you :)
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
13y
I agree, there are some properties priced at $15,000 or less out there but they are in a "warzone" so to speak and I won't go there. I prefer to get properties without the headaches.
Real Estate Consultant · Brighton, MI · Member since 2013 · 607 posts · 251 votes
13y
William Brace, Ali Boone, Dawn A.
Our Michigan rentals net yearly income comes to $5,040 giving us a net yield of nearly 15%. I can assure you that not one of these are located in "war zones" bur rather in beautiful, clean and safe suburbs. It's usually someone who is unfamiliar with an area who is more likely to place labels like that. Michigan has many beautiful areas including University District, Eastside, Capac, Grosse Pointe and Lincoln Park just to name a few. I go there several times a years, meet investors and we provide tours of the area. Why not take a trip to see for yourself before you turn your back on what could likely be a big bonus for your wallet.