I was talking to a real estate agent about rental properties, and i was explaining when im analyzing a deal (which is all i have done so far) how i calculate in percentages for vacancy’s, repairs, cap ex etc. They said they do a simple calculation of.
Monthly rental income x 12 / purchase price.
And they look for the number to be between 50 and 100%. With 75% being an average return and closer to 100% the better. This seems like a very general way to calculate things and not all that accurate? Anyone seen or done this before?
@Jesse Unrath Hello Jesse, are you sure this was the calculation they gave? For example:
1000 (monthly rental income) x 12 (months) = 12,000 / 100,000 (purchase price) = 12%
This example does meet the 1% rule which means that the monthly rent income is 1% of the property purchase price (1000/100,000 = 1%). This is a common calculation investors use, but should not be the only one taken into consideration. If purchasing a property and then spending on rehabbing it before it is ready for rent then those rehab costs should be including in your purchase price costs when calculating for the 1% rule. Other factors to consider should also include the age/condition of the property & the neighborhood as you do not want to invest in low class areas just so they meet your cash flow criteria.
What the realtor was talking about were some rules of thumbs that can be used to quickly assess whether a property is a possibility. We use the 1% rule to rule in or out properties to see if they're worth additional scrutiny.
There's no substitute for working up a spreadsheet on a property. We do this on every property before we offer on it. (after viewing/inspecting it). The spreadsheet we use breaks out repair costs, etc and it's how we come up with our offer price. We typically make one offer which is our highest and best. We either get our offer accepted or rejected but rarely raise the amount.
@Satyam Mistry Actually after re reading the email they were definitely talking about the 1% test. It was late and i was tired haha. Thanks for the reply.
@John Teachout yup makes sense, thats a smart way to go about it. If you have a number that will work for you, no sense deviating from the plan.