How good is your cashflow if property does not match 1% rule

Question

Hey Guys,

I am in the process of analyzing deals and making offers ( already signed second offer, fingers crossed ).

In this process of analyzing deals, I have realized that if the property is not falling under the 1% rule ( I know it's quick math ) I don't even look at that my cash flow drops to 5-6%

But Some of them are very nice homes in good areas and I am skipping over those just because on paper they don't seem like a good deal. But still, someone else is still buying that property for sure.

Here is what I am trying to understand:

How do other folks have positive cash flow if it's not the 1% rule? Would some of you mind sharing what other things you look at while analyzing deals?

I would appreciate it if you can share some numbers like purchase Price, Rent, Cashflow, zip code? It could help me and new investors to have a feel of what to aim at?

Areas I am looking in is Memphis and in general, If I have to say I am using the below numbers to analyze :

• Vacancy: 5% ( Increase it to 8 If I doubt the location )
• Repairs: 8% ( reduce it 5 if newer property )
• Capex: 8% ( reduce it 5 if newer property )
• Prop Management: 10%
• Leasing Fee : 3%

Thank You

Bill B. · Answer

You can easily have cashflow closer to 0.7% if you pick the right locations. You can easily lose money at 1% if you pick the wrong locations.

You don’t want 100 year old homes, you want 20 year old homes, or newer.

You don’t want property taxes approaching $4,000/yr for a $400k house, you want $2,000/yr

You don’t want a home that is subject to hurricanes, flooding, tornadoes, earthquakes or snow storms

You don’t want states/areas where insurance is routinely over $2,000/yr when it can be found in other states for $600

You don’t want to be in a state that takes 8% of your income in state tax when other states take 0%

You don’t want houses with siding or roofs with shingles or yards that need maintenance when stucco/tile/rocks exist

You don’t want states that make you pay to remove a tenant, or deny you the right, when other states make it “easy”

You don’t want a city/state that tells you how much rent you can charge or how much you can raise it while not limiting expenses.

Those are the givens… personally I add you don’t want your tenants sharing a wall where you have tenant on tenant complaints. And you don’t want properties with less than 3 bedrooms unless you’re targeting seniors or planning on lots of turnover.

Joe Splitrock · Answer

@Saurabh Kukreja most the houses I purchase are about 0.8% rent to purchase ratio instead of 1%.

Cash flow changes based on down payment, interest rate and loan terms. I refinanced two houses and increased my cash flow $400 between the two properties, with no other changes.

Of course, cash flow is also a byproduct of expenses. Your total expenses are 34% of rent and that doesn't include taxes or insurance, which probably puts total expenses over 50%. That is pretty steep expenses.

Also keep in mind that nice homes in good areas attract better tenants, have less expenses and less vacancy. New investors gravitate towards the cheaper properties, not understanding it is about total return on investment. The properties that look like cash cows on paper are often expense hogs.

Jason Rhodewalt · Answer

@Saurabh Kukreja - I have 4 SFH's in the Memphis area. I have a PM at 8% and I usually buy newer homes so I'm more like 5% on capex/repairs total (dunno if that's right or not). I use 4% for vacancy and don't put away for lease up (maybe I should) With that said I have one home I bought for $166k and rent for $1425 on a 2 year lease. With a 20% DP and insurance of $550/year I expect about a 9.6% CoC return and $400/month CF.

To @Joe Splitrock 's point the cash flow and CoC depend a lot on your financing as well

Anthony King · Answer

@Saurabh Kukreja play around with your numbers on the dealcheck app.

Bill B. · Answer

To follow up on joe’s comment about higher rent attracting “easier” tenants.  The highest rent I collect is $3,000/mo. I have heard from the tenant twice in 6 years. The garage door opener wouldn’t open and the fridge wasn’t cold. 2 calls to Home Depot and problem solved.

Joe Splitrock · Answer

The challenge with lower dollar properties is repairs cost about the same in a $75K house as they do in a $200K house, but rents are much higher in a $200K house. Simply put, the cheaper your house is, the higher your expense ratio. You will also spend more time managing a tenant in cheap house, so your rent collected per time spent is considerably lower. I don't think sub-$100K houses exist in good neighborhoods anywhere in America today. Maybe rural areas, but if it is in a city, you are in C- or D neighborhoods.

Steve Vaughan · Answer

Excellent points, Bill.  NV is my top pick if I go OOS for no income taxes, humidity, storms, floods, earthquakes, ice and snow and landlord friendly. Just need to find a market at 2700ft or below.

Even with my blended private money rate avg of 5.4% I can cf with a .7% deal, too.

But l place quality tenants that stay and property taxes and insurance are cheap.  My main goal is equity capture, but the right assets can cf far below 1% if self-managed.

My portfolio with a PM needs 1% and that's where I bought it at.  Costs too much for them to do service calls and their tenant selection skills pretty much suck.

Ian Walsh · Answer

50% P/I rule seems to be a more accurate guideline imo.

Saurabh Kukreja · Answer

Thank You @Jason Rhodewalt for sharing your numbers. I think I am trying to evaluate my numbers on a very conservative approach. This could be a little aggressive ( to me ) but will definitely see if this works for me.

Saurabh Kukreja · Answer

Thank You @Joe Splitrock for sharing your thoughts, I really like your last point and I think I have been doing that trying to find properties around 100K but gravitating towards 75K - 80K, With this approach I think I can look in better neighborhoods with better prices.

How good is your cashflow if property does not match 1% rule

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