What is our local "2 percent test"?

Question

We've all heard about the .5, 1, or 2 percent test, or the rent to purchase ratio. However, based on your experience, what is our local, Knoxville "test"?

If you would rather it broken down into neighborhoods, what would be the "tests" for the following neighborhoods:

-North Knoxville (Central / Broadway)

-Cedar Bluff

-Farragut

-Downtown

-Hardin Valley

I think this will be helpful for all Knoxville investors.

Thanks!

Michael

Christopher B. · Answer

That's precisely it Chris. Its the Brrrr strategy as they lovingly dubbed here on BP. We prefer distressed properties for numerous reasons such as increased returns through sweat equity/forced appreciation, and what we fill will be lower long-term maintenance as our properties have received significant if not complete remodels. They're basically brand new propeties. Larger remodels don't deter us and all of these properties required a lot of work.

Triplex: purchase $140k,  rent $2159 (this is actually a bit lower than we can get, we'll begin upping after renewals next year)

Duplex: purchase $105k, rent $1600

North sf: purchase $42k, rent $750 (admittedly underpriced this house, I can get $800 for it which even my current tenants have acknowledged!)

South sf: purchase $57k, rent $875

Christopher B. · Answer

I personally don't see how one can generate any real cash flow off property that's 1% or less. I have 4 properties and they average about 1.6%.

Triplex in north knox: 1.54%

Duplex in north knox: 1.5%

Single family in north knox: 1.8%

Single family in south knox: 1.6%

I live North which is why most of my properties so far are on that side of town but have seen the ability to generate similar returns on any side of Knoxville.

Chris Eaker · Answer

I just ran the calculations and I am actually surprised that my properties are pretty close and one is actually right at 1%. So I guess I will eat my words and say it's possible in Knoxville.

1. For my Fort Sanders student condo, it's 0.96%.

2. For my Bearden SFH, it is 1%.

3. For my Lenoir City duplex, it's 0.92%

4. I can't calculate it for my Powell condo since it was purchased 15 years ago as my wife's residence, but it currently gets $775 and is going up to $795 on June 1. They're selling for around $80k-85k, so it's slightly below 1%.

I'm looking at a duplex now that I could get for $100k and market rent is $625/side, so that would be 1.25%.

Christopher B. · Answer

Sure.

It sounds generic but we've tackled about every kind of project one can in the 6yrs we've been in business. From the "paint and carpet" cosmetic rehabs to a house we are finishing up now that was a 200yr old log cabin that required us to catch the top story of the home with industrial steel i-beams and remove the entire bottom half of the house and rebuild it from the footers up. Then set the 2nd story back down. We like houses with structural issues and old homes with lots of character pique our interest as well. We just appreciate their beauty and like working to preserve it. We're also beginning to look at more basic rehabs to increase of volume.

Triplex: purchase $40k, rehab $100k (includes holding costs, etc) We are finishing up the final unit now and the last time I did a budget review it was projected to come in under budget. Rehabbed everything because this was a single family home we converted into a multifamily. Roof, siding, windows, insulation, electrical, plumbing, hvac, flooring, etc.

Duplex: purchase $70k, rehab $35k. This was our first project and did almost all the work ourselves, mostly a cosmetic rehab.

North single family: purchase $10k, rehab $32k. Electrical, roof, and windows in good shape. Needed everything else, had to reframe couple of rooms floor systems and did a lot of exterior yard work such as grading and clearing.

South single family: purchase $19k, rehab $37k (projected) we just started work on this but have a conservative budget. House needs everything, roof, all mechanicals, etc but it's bones are good and it is a smaller home.

Michael Bowie · Answer

@christopher

@Christopher B. Thank you for the information, Chris! That is very valuable information.

You mentioned the purchase price, but how much was the original purchase price & how much was renovation?

Also, what kind of rehab work did you do to the property? Are there specific niches you look for to redo in properties?

Thank you in advance!

Chris Eaker · Answer

@Christopher B.

I'd like to know the actual numbers on those properties, i.e. what are the rents and how much did you pay for the properties.  You must be buying pretty far below market value to get the numbers you're getting. I know you said you do renovations, so did you buy them distressed and then fix them up?

Cory Anderson · Answer

Thanks for the post Michael, this is great information to have. From what I have seen, and as shown in @Chris Eaker's properties, 1% is a very good target income-expense ratio for SFR's around the Knoxville area and I haven't seen a ton of variance between those locations you mentioned. With that being said, Multi-family investments should be a little higher, depending on the condition and current management of the property. I'm like you though, I would like to see what others have to say on the subject, I have wondered the same thing.

Michael Bowie · Answer

Interesting. Thank you! That really helps. Great job, by the way. Would love for more Knoxville investors to chime in as well to see if they're having the same experience. I've found those quick rule of thumbs really help me focus my search.

Michael Bowie · Answer

Exactly. I was thinking the same thing. So, referring to the original question, what do you believe is the fair market rule for rent to purchase ratio in Knoxville? Or, what is this ratio on your current properties?Thanks @Chris Eaker!

What is our local "2 percent test"?

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