Finding deals based on sales comps, but rental comps too low!

[Amber Lister]

All of my experience has been in business investing, so real estate is still a new area for me. Buy & Hold and building a portfolio of rental properties is my goal. Here is where I'm struggling and I'm not sure if I'm doing something wrong in my search... I am finding good off-market deals that I am able to invest a total of 75%-85% of ARV. The problem is, I cannot find any areas in which the rental comps are also 1% of that ARV. So, cash out refinance won't go well and cash flow won't be possible. I'm in Houston, Tx where the market is pretty good so I can't figure out what I'm doing wrong. At this rate, I will only be able to fix and flip and I won't be able to hold and lease out any of my investments. I don't want to sit around and buy nothing at all so I'm fine with flipping for now but I REALLY want to start building our portfolio and I feel like maybe I'm misunderstanding something with this strategy.

Truly appreciate any thoughts or insight!

[Taylor L.]

The 1% rule isn't really a hard and fast rule, it's just a rule of thumb that helps with first-pass analysis. Underwriting your deals should go deeper than the 1% rule. There are calculators out there which will help you dig deeper into projecting cash flows, like the one BP offers, or you can build your own.

[Craig Clinton]

Hello Amber

The 1% rule is pretty general rule and I wouldn't base an investment decision off of that. I have 6 cash flowing rentals and none of them meet the 1% rule. I think a better formula to base your decision on is cash on cash return. For example, let's say you buy a $100,000 house that you put $20,000 out of pocket into it and your cash flowing $200 per month. That's $2,400 per year divided by your $20,000 cash out, equals a 12% return. Are you ok with that return % on your money? That's what you need to ask yourself. Ideally, with the BRRRR method, you have no out of pocket money in the deal after refi and you earn infinite returns.

You also need to calculate what the DSCR (debt service coverage ratio) if you're going to refi a property. This is calculated by taking your monthly rent and dividing it by your monthly expenses (mortgage, taxes, insurance, utilities, other). Most banks are looking for a DSCR of at least 1.2.

I'm sure BP has a rental calculator or cash flow calculator on the website.  You should take a look for one.  

Good luck and feel free to run a deal by me if you'd like.  Just leave off the address.  

[Amber Lister]

Quote from @Taylor L.:

The 1% rule isn't really a hard and fast rule, it's just a rule of thumb that helps with first-pass analysis. Underwriting your deals should go deeper than the 1% rule. There are calculators out there which will help you dig deeper into projecting cash flows, like the one BP offers, or you can build your own.

 You're absolutely right, thanks Taylor!  

[Hunter Terryn]

Hey Amber! I agree with Craig and Taylor that the 1% rule is definitely more a guideline than a requirement. I have tons of investors that have come off the 1% rule slightly in the last 6 months, with prices rising along with interest rates. Keep in mind, for higher class properties (B and above), investors aren't as much expecting the higher cash flow, but more so the long-term appreciation, so those properties often come in under the 1% rule. 

That said, we're still seeing BRRRR deals come through at the 1% rule or above in some of our markets like Birmingham, Detroit, Columbus, and Memphis. These markets tend to have lower entry points and great value-add opportunities, supported by solid rental comps. Not sure if remote investing is part of your strategy yet, but definitely recommend getting a team together if you plan on investing outside of Houston.

[Amber Lister]

Quote from @Craig Clinton:

Hello Amber

The 1% rule is pretty general rule and I wouldn't base an investment decision off of that. I have 6 cash flowing rentals and none of them meet the 1% rule. I think a better formula to base your decision on is cash on cash return. For example, let's say you buy a $100,000 house that you put $20,000 out of pocket into it and your cash flowing $200 per month. That's $2,400 per year divided by your $20,000 cash out, equals a 12% return. Are you ok with that return % on your money? That's what you need to ask yourself. Ideally, with the BRRRR method, you have no out of pocket money in the deal after refi and you earn infinite returns.

You also need to calculate what the DSCR (debt service coverage ratio) if you're going to refi a property. This is calculated by taking your monthly rent and dividing it by your monthly expenses (mortgage, taxes, insurance, utilities, other). Most banks are looking for a DSCR of at least 1.2.

I'm sure BP has a rental calculator or cash flow calculator on the website.  You should take a look for one.  

Good luck and feel free to run a deal by me if you'd like.  Just leave off the address.  

Thank you so much Craig! Maybe I'm overthinking it a bit. I should at least dig in to the numbers a lot more before writing the deal off. I've just been discouraged with how significantly off these rental comps are (from 1%) compared to ARV and my thought was, if they are off by a lot, then the DSCR will also not be met when it comes time to cash out refi. I'm new to this and I pay cash for everything with no lender money so I think I'm being overly cautious on which deals to move forward with because I have never gone through a DSCR refi before.

How closely related are the 1% rule and the DSCR calculation in your experience. Maybe I incorrectly assumed they kind of went hand in hand.

[Amber Lister]

Quote from @Hunter Terryn:

Hey Amber! I agree with Craig and Taylor that the 1% rule is definitely more a guideline than a requirement. I have tons of investors that have come off the 1% rule slightly in the last 6 months, with prices rising along with interest rates. Keep in mind, for higher class properties (B and above), investors aren't as much expecting the higher cash flow, but more so the long-term appreciation, so those properties often come in under the 1% rule. 

That said, we're still seeing BRRRR deals come through at the 1% rule or above in some of our markets like Birmingham, Detroit, Columbus, and Memphis. These markets tend to have lower entry points and great value-add opportunities, supported by solid rental comps. Not sure if remote investing is part of your strategy yet, but definitely recommend getting a team together if you plan on investing outside of Houston.

 Hi Hunter!  Remote investing is absolutely a part of the plan!  I wanted to start "in my backyard" until I was comfortable and confident in what I'm doing and then I will start exploring other markets.  Thank you for the suggestions!

[Eliott Elias]

You can't have it all! If your goal is to scale and have as many properties as possible cash flow probably isn't too important to you. As long as it breaks even with the mortgage you should be okay. If cash flow is really desired then I would consider airbnb 

[Nicholas Misch]

As stated already by several people the 1% rule is a very loose general rule. I usually have minimum cash flow I desire from a deal and then work everything around that (if cash flow is my main focus). Also as stated that sometimes and some markets investing for appreciation is the goal due to low cash flow ability but big long term appreciation which is what really leads to wealth. One of the few things that I agree with Warren Buffett on is his quote:

“The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule.

I think, at least for me that applies to investing in real estate as well. Now while I don't expect that I will NEVER lose money at all, I go into every deal with the minimum standard that it wont lose money as I have run the numbers to the best of my ability. 

I wish you the very best on your new real estate investing endeavors!

[Craig Clinton]

Thanks for asking me that question.  It made me go back and check my numbers.  I actually have one property that meets the 1% rule.

Here are 5 of my rentals

[Evan Polaski]

@Amber Lister: I was trying to find this great CBRE graph that basically showed real estate values are far outpacing rent growth, hence the 3% in financial crisis becoming the 2%, becoming the 1%, and now in most stable submarkets of major metros, you are looking at 0.5-0.75% rule.  The point being, values nation wide are growing faster than rents, and have been for a long time.  As such, everyone is really buying for appreciation, whether or not they realize it yet.

So on your refi, you need to be talking to banks now and learning how they will underwrite the loan. For SFR and small multi's most will have a generic equation to calculate NOI and therefore DSCR, which is what you are concerned about with your 1% piece and not being able to refi out your proceeds.

[Amber Lister]

Quote from @Eliott Elias:

You can't have it all! If your goal is to scale and have as many properties as possible cash flow probably isn't too important to you. As long as it breaks even with the mortgage you should be okay. If cash flow is really desired then I would consider airbnb 

 No, cash flow is definitely not important for me.  I was primarily concerned about the refi process!  I didn't want to acquire these properties, go to refi, and then not be able to get the cash back out because rental comps are too low.  Like you said, at minimum, I need rent to cover my expenses for the sake of refinancing without an issue. 

[Amber Lister]

Quote from @Craig Clinton:

Thanks for asking me that question.  It made me go back and check my numbers.  I actually have one property that meets the 1% rule.

Here are 5 of my rentals

 I can't thank you enough.  Seeing these numbers puts it into perspective for me really well! 

[Amber Lister]

Quote from @Evan Polaski:

@Amber Lister: I was trying to find this great CBRE graph that basically showed real estate values are far outpacing rent growth, hence the 3% in financial crisis becoming the 2%, becoming the 1%, and now in most stable submarkets of major metros, you are looking at 0.5-0.75% rule.  The point being, values nation wide are growing faster than rents, and have been for a long time.  As such, everyone is really buying for appreciation, whether or not they realize it yet.

So on your refi, you need to be talking to banks now and learning how they will underwrite the loan. For SFR and small multi's most will have a generic equation to calculate NOI and therefore DSCR, which is what you are concerned about with your 1% piece and not being able to refi out your proceeds.

This is great advice. Yes, the way the market is looking out here, 1% is next to impossible at this point. I will definitely talk to my lender and get a clear idea of how they will calculate DSCR. Thank you!

[Cody L.]

Quote from @Amber Lister:

All of my experience has been in business investing, so real estate is still a new area for me. Buy & Hold and building a portfolio of rental properties is my goal. Here is where I'm struggling and I'm not sure if I'm doing something wrong in my search... I am finding good off-market deals that I am able to invest a total of 75%-85% of ARV. The problem is, I cannot find any areas in which the rental comps are also 1% of that ARV. So, cash out refinance won't go well and cash flow won't be possible. I'm in Houston, Tx where the market is pretty good so I can't figure out what I'm doing wrong. At this rate, I will only be able to fix and flip and I won't be able to hold and lease out any of my investments. I don't want to sit around and buy nothing at all so I'm fine with flipping for now but I REALLY want to start building our portfolio and I feel like maybe I'm misunderstanding something with this strategy.

Truly appreciate any thoughts or insight!

 Yes, because people who are buying a house to live in don't care about the purchase:rent ratio.  So you can find a $800k house that is similar to homes that sold for $900k.  Doesn't mean it's going to make a good rental income property.

Even way back when I started (14 years ago), buying something that was no more than 100x rent was hard.  I bought a few $200k condos in a nice area of town (Montrose) that rented for about $2000/month.  But that became hard.  So I found an 8 unit that I bought for $440k that rented for $4,400/month (total).

You can still find "1%" deals.  Last year I bought a bunch of patio homes for $245k each.  They don't quite rent for $2.45k/month but they avg about $2,200/month.  So close enough. 

Gotta move to multi.  Or just accept a lower return and bet that inflation and rent growth will save you long term. 

[Dan Heuschele]

Quote from @Amber Lister:

Quote from @Craig Clinton:

Hello Amber

The 1% rule is pretty general rule and I wouldn't base an investment decision off of that. I have 6 cash flowing rentals and none of them meet the 1% rule. I think a better formula to base your decision on is cash on cash return. For example, let's say you buy a $100,000 house that you put $20,000 out of pocket into it and your cash flowing $200 per month. That's $2,400 per year divided by your $20,000 cash out, equals a 12% return. Are you ok with that return % on your money? That's what you need to ask yourself. Ideally, with the BRRRR method, you have no out of pocket money in the deal after refi and you earn infinite returns.

You also need to calculate what the DSCR (debt service coverage ratio) if you're going to refi a property. This is calculated by taking your monthly rent and dividing it by your monthly expenses (mortgage, taxes, insurance, utilities, other). Most banks are looking for a DSCR of at least 1.2.

I'm sure BP has a rental calculator or cash flow calculator on the website.  You should take a look for one.  

Good luck and feel free to run a deal by me if you'd like.  Just leave off the address.  

Thank you so much Craig! Maybe I'm overthinking it a bit. I should at least dig in to the numbers a lot more before writing the deal off. I've just been discouraged with how significantly off these rental comps are (from 1%) compared to ARV and my thought was, if they are off by a lot, then the DSCR will also not be met when it comes time to cash out refi. I'm new to this and I pay cash for everything with no lender money so I think I'm being overly cautious on which deals to move forward with because I have never gone through a DSCR refi before.

How closely related are the 1% rule and the DSCR calculation in your experience. Maybe I incorrectly assumed they kind of went hand in hand.

 In most cases I would say anyone investing in small unit count residential housing for 12% return likely either does not know what other options are available or how much work residential is (most likely both).  12% return when historical on S&P approaches 10% and is more passive.  12% return when most syndicators offer upper teens or low 20s for much more passive LP option.

Multifamily is not passive.  The returns per unit should be at least $400/month and the RE should produce a >20% return.  Otherwise there are better options.

I strive for and typically have achieved the infinite return (i.e. all money extracted from property).  Granted this is much less passive than purchasing a property without a value add.

Good luck

[Dan Heuschele]

Quote from @Amber Lister:

Quote from @Eliott Elias:

You can't have it all! If your goal is to scale and have as many properties as possible cash flow probably isn't too important to you. As long as it breaks even with the mortgage you should be okay. If cash flow is really desired then I would consider airbnb 

 No, cash flow is definitely not important for me.  I was primarily concerned about the refi process!  I didn't want to acquire these properties, go to refi, and then not be able to get the cash back out because rental comps are too low.  Like you said, at minimum, I need rent to cover my expenses for the sake of refinancing without an issue. 

I am confused as normally people who are looking to use DSCR have modest income (too low to qualify for conventional loan) and cash flow is very important when they start out. You indicate cash flow is not important. Do you have the income for a conventional loan? Why are you looking at DSCR loans? Are you planning on purchasing >4 unit properties?

If you qualify for a conventional loan on <5 unit properties, the loan will be based on comps and not property rent.

I suspect in Houston you can typically cash flow at 0.9% ratio if self managed for small unit counts.  Follow @Cody L. as Houston is his domain.  Lately he has been flying under the radar.  He has largest Houston presence of anyone I can think of on BP.

Good luck

[Lucia Rushton]

@Amber Lister the 1% was “created” if you probably 10 years ago. That market no longer exists especially in metro cities, especially Houston. And expecting a turn key property to generate those numbers. If that is your only criteria you will miss a lot of opportunities. Today the majority of RE investors create an opportunity to generate success. Too many buyers in all markets right now. Best wishes

[Becky Hoffman]

Hi Amber, I'm a fellow Houston flipper/landlord. I read that you are finding plenty of 75% flip deals, what's your secret? I haven't bought a flip in a year!!! Everything is 80% or more!

[Steven Foster Wilson]

Quote from @Amber Lister:

All of my experience has been in business investing, so real estate is still a new area for me. Buy & Hold and building a portfolio of rental properties is my goal. Here is where I'm struggling and I'm not sure if I'm doing something wrong in my search... I am finding good off-market deals that I am able to invest a total of 75%-85% of ARV. The problem is, I cannot find any areas in which the rental comps are also 1% of that ARV. So, cash out refinance won't go well and cash flow won't be possible. I'm in Houston, Tx where the market is pretty good so I can't figure out what I'm doing wrong. At this rate, I will only be able to fix and flip and I won't be able to hold and lease out any of my investments. I don't want to sit around and buy nothing at all so I'm fine with flipping for now but I REALLY want to start building our portfolio and I feel like maybe I'm misunderstanding something with this strategy.

Truly appreciate any thoughts or insight!

You should consider investing OOS here in Columbus or Cincinatti. The price to rent ratio makes for great investments. Not to mention our appreciation has been 8% higher then the US national average, because of the high demand for affordable housing.

https://www.calculator.net/ren... I use this calculator to run my numbers. I would be talking to your realtor and see if you’re running the numbers correctly. It’s their job to help you find a good deal. 

[Effram Barrett]

If you're finding off market deals deals with a decent spread, then that's at least a win. Houston is an awesome market to invest in, and someone above mentioned short term rental which typically do very well. Another niche that flies under the radar is housing voucher (formerly section 8) There is a negative stigma attached to it, but the returns can be pretty good as well. Properties are based on zip code tiers so if you find a great property in a zip code that pays well, that's a win. There are more hoops to jump through, with the city having to inspect the unit etc, but it can really jump start your portfolio once you get past the red tape. 

If you need anything, don't hesitate to reach out. I'd love to hear about how you're finding off market deals as well.

[Joshua Janus]

Quote from @Amber Lister:

All of my experience has been in business investing, so real estate is still a new area for me. Buy & Hold and building a portfolio of rental properties is my goal. Here is where I'm struggling and I'm not sure if I'm doing something wrong in my search... I am finding good off-market deals that I am able to invest a total of 75%-85% of ARV. The problem is, I cannot find any areas in which the rental comps are also 1% of that ARV. So, cash out refinance won't go well and cash flow won't be possible. I'm in Houston, Tx where the market is pretty good so I can't figure out what I'm doing wrong. At this rate, I will only be able to fix and flip and I won't be able to hold and lease out any of my investments. I don't want to sit around and buy nothing at all so I'm fine with flipping for now but I REALLY want to start building our portfolio and I feel like maybe I'm misunderstanding something with this strategy.

Truly appreciate any thoughts or insight!

I would look into markets in the midwest as the cash flow can help you build your portfolio!  

Columbus, Ohio is a great market to invest in. The population has been growing here year over year over the last decade, it is home to The Ohio State University which has over 50,000 students that live here along with those that visit, and it also holds a diverse range of young professionals and traveling nurses to fill the demand of the multiple business corporations and hospitals stationed here. The appreciation rate in Columbus has been 8% higher than the national average over the last year. Tech companies are continuously moving here and establishing a footprint in Columbus as well. Intel is a great example, who is building the largest chip manufacturing plant in the US right here, and it will be a $20 billion dollar investment that brings a few new thousand jobs.

https://www.dispatch.com/story/business/2022/01/21/intel-ohio-building-computer-chip-factories-licking-county-jersey-township/9173472002/

Another example of economic growth is the upcoming Ohio State University Wexner Medical Center Inpatient Hospital which is a 1.9million square foot hospital that will bring over 800 new beds and a thousand new jobs.

https://abc6onyourside.com/news/local/new-osu-hospital-expected-to-transform-health-care

Here are a few more recent investments

https://www.10tv.com/article/money/business/hydrogen-power-company-hyperion-bringing-700-jobs-to-columbus/530-25907aab-5517-4661-a9f3-d2ed2d5be6b0

https://news.wosu.org/news/2022-02-08/rumpke-to-build-50-million-recycling-facility-in-columbus

Check out The Complete Guide to the Columbus, Ohio Real Estate Market which goes through the Columbus, Ohio market in depth and will give you a better scope of where the highest levels of growth are taking place and where to look to invest.

[Wale Lawal]

I don't want to sound like a broken record, but as most have said the 1% rule is a guideline. I am an investor agent in the Houston area and there is plenty of cash flow properties out there.

I will suggest you define your criteria and make an offer on every property that meets these criteria. Price should not be a criterion, make offers based on what that property is worth to you.

Use Niche.com, Greatschools.org, and Msc.Fema.gov for your research.

Please feel free to reach out if you need more insight on the Houston market

[Amber Lister]

Quote from @Cody L.:

Quote from @Amber Lister:

All of my experience has been in business investing, so real estate is still a new area for me. Buy & Hold and building a portfolio of rental properties is my goal. Here is where I'm struggling and I'm not sure if I'm doing something wrong in my search... I am finding good off-market deals that I am able to invest a total of 75%-85% of ARV. The problem is, I cannot find any areas in which the rental comps are also 1% of that ARV. So, cash out refinance won't go well and cash flow won't be possible. I'm in Houston, Tx where the market is pretty good so I can't figure out what I'm doing wrong. At this rate, I will only be able to fix and flip and I won't be able to hold and lease out any of my investments. I don't want to sit around and buy nothing at all so I'm fine with flipping for now but I REALLY want to start building our portfolio and I feel like maybe I'm misunderstanding something with this strategy.

Truly appreciate any thoughts or insight!

 Yes, because people who are buying a house to live in don't care about the purchase:rent ratio.  So you can find a $800k house that is similar to homes that sold for $900k.  Doesn't mean it's going to make a good rental income property.

Even way back when I started (14 years ago), buying something that was no more than 100x rent was hard.  I bought a few $200k condos in a nice area of town (Montrose) that rented for about $2000/month.  But that became hard.  So I found an 8 unit that I bought for $440k that rented for $4,400/month (total).

You can still find "1%" deals.  Last year I bought a bunch of patio homes for $245k each.  They don't quite rent for $2.45k/month but they avg about $2,200/month.  So close enough. 

Gotta move to multi.  Or just accept a lower return and bet that inflation and rent growth will save you long term. 

Thanks Cody! Are you doing cash and then cash out refinance? Or conventional loan with down payment? I got started with the intention of buying multi-family only. My first purchase was a huge duplex in South Houston. It cash flows well and I bought it under value so I've been really happy with it but it was a conventional loan so I realized I couldn't keep buying properties quickly if I'm paying 20% down every time. That's why I switched to BRRRR so I could pull out most of my cash. I just feel like it has limited my cash budget and multi-family has become a little more out of reach.