I'm curious how you deal with the 1-2% rule. Do you lower the percentage to make a deal work or do you just end up putting more down? Or just find extremely good deals?? Or just not buy and hold lol.
Also on new construction would it be safe to lower your estimate for repairs and especially cap ex, since everything is brand new?
I don't really use the 'rules' as rules, just things to think about, consider.
I look at a comparison to the profit considering how I could otherwise invest the money.
So say a house, full cost including rehab is $100k.
If the house could be sold for $150k net after being fixed, that is $50k profit in less than a year. Great investment for me--I keep and rent the houses, so will sit on that profit for now. Better profit than anything legal I know of.
Now with that $100k cost, if I can rent that house for a net of $800 a month, that is $800 x 12 months = $9,600 a year net profit, giving a 9.6% profit on my investment, great rental deal for the long term! Better than stocks, bonds, and conservative loans right now.
Not the typical way of looking at things on BP, but thought I'd throw it out there. In the end everything is really just a guideline to set a basis to consider a deal.
In Portland we look for something around the .75% to .8% rule and only use that with minimum of 75% LTV. Ideally we like to get 100% of our cash out by doing a value add project and refinancing the property.
We recently bought a 4 plex in Lake Oswego for ~$800k and immediately raised rents to $6400/m.
That one was a decent deal. If you find something around the .75% and the property has normal expenses, then you found yourself a good deal.
Fir single family homes it’s much much harder. We don’t really look at those for buy and hold assets, really only value add.
I can not make acceptable positive cash flow long term below the 1% threshold. Not really worth my time and effort.
You asked about "putting more down", the amount of DP has no relation to how much cash flow the "property" produces. It increases the amount of cash flow your own money is generating (buying). They are two entirely different income generating streams.
Hey @Thomas S. thanks for that. Can you expound on what you were saying? The more money down, the lower your mortgage will be. How does this not directly relate to cash flow? Are you referring to your own money vs. other peoples money?
I think what @Thomas S. meant to say is cash-on-cash calculation wouldn't change as it is a ratio between Annual Pre Tax Cash Flow verse the Acual Cash invested. So as your downpayment increases so does your cashflow...making no difference whether you put a bigger downpayment.
Cash flow on the other hand is simply up or rent minus expenses.
@Kent Nielson it’s all dependent on risk. I’ve bought 1, 2 and 3 percent deals. I personally prefer higher (2-3 percent deals), but that’s just one factor. I also look at area it’s in and what sort of tenants I get.
I just closed on a property that I paid 38k for and rent is 550. Is that a bad deal? Well if you just look at those numbers it’s “average”. Except it appraised at 55k, as it sits, is in good shape, has good tenants and below market rent (which I can increase).
In a B class area. So to me, I think that’s a good deal, hence why I bought it. Price to rent ratio is just one thing to look at, not the only thing
I bought a duplex in Lebanon OR this year where I got about 0.78%. I did a significant remodel of one of the units. My rents are still a little low, especially one of them and I'm currently paying for garbage service and lawn care. It's extremely difficult to find something that can get you 1% in this market unless it's either a larger multi family property or it's a true fixer upper and you need to put a lot of work into it for it to be in rentable condition. I'm not so concerned about the 1% rule though. The way I see it is that it covers my mortgage and expenses and I can still cash flow a little every month. I like the location of the duplex and its future appreciation potential. I'm in it for the long term and eventually rents will increase so it will hit the 1% rule in a few years.