Question regarding SFH Rental in Michigan (50% Rule)

7 Replies

Hello all,

Let me preface this post with- I am still new and looking for my best SFH rental entry point (so please.. go easy..) In doing research and crunching #s, I'm struggling with getting anything to cashflow with using conventional financing, especially when using the 50% rule for expense estimating.

As example, the following property is listed for $75K in my area: http://www.moveinmichigan.com/MIMPubliclogon.aspx?...

If I buy this property at $75K, put 20% down with a conventional 30 yr, and achieve $1k/mo in rent (which is what comps for this type of property)... the following #s is what I see at a high level:

- Principal & Interest: $293/mo

-Tax : $150/mo

-Insurance (est): $50/mo

Total PITI: $493

Est Expenses (50% Rule): $500

-----------------------------------------

Total Expense + PITI = $993/mo

Income ($1k rent w/ 9% Vacancy Loss): $910/mo

Cashflow in this scenario is negative.. with 1.3%  rent/price ratio.

Even with a sales price of something like $55K (1.8% rent/price ratio), this doesn't cash flow.

Now with the same above scenario, using est 30% expense assumption cashflows $180/mo.

Am I being too conservative on expenses for a ~1,200 sq ft. brick bungalow ? I'm not seeing how traditional financing, while using the 50% rule for est expenses, is going to cashflow at all with properties under $150K. 

I realize the 50% rule is just a gross figure to use to quickly evaluate a deal, but if I were to use this on anything it would seem to always showstop any property.

Welcome to BP @Erik Romzek . The 50% rule is just a guideline but you are not using it correctly. (You are counting some expenses twice--interest, taxes, insurance, vacancy.) It states that 50% of the rent for most rental properties will go toward expenses (this is all expenses) over time. In your example that would be 50% of $1,000/mo = $500/ month. The other $500/ month is available for debt service and profit. In your example debt service is $293 so you would expect a cash flow of $500-$293 = $207. That is all there is to it. If $207/month is an acceptable cash flow for you this is a property worth further consideration.

The 50% rule and the 2% rules are just guidelines to check out a property really quick. For me this one would not be a deal. There are better ones then this all over Michigan. If I was putting 15 to 20 thousand down I want cash flow and a lot of it.

price seems a little high to me.  You should be able to pick 3/1 in Redford for 65 or under.

Also I know its a 2 bathroom but I think it is always best when the second bathroom is with the master bedroom and not stuck in the basement.

It does look like a nice property though.  You could get a 3/1 in the SE section of Farmington Hills for 75k.

1k might be pushing the limits for that area.  @Joe Villeneuve  knows this area much better than I.

@Erik Romzek  

@Scott K.  Is correct when he says it's a little high.  Livonia and Redford are your starting points on our side of town (I'm a few miles south of you in Plymouth).  Eric, you can contact me anytime and I'll help you find what you're looking for.

@Erik Romzek  - awesome to see you getting involved in the game.

I can help you with this, just send me a PM with your # we'll catch up. It's been a while since the old football days.

Originally posted by @Joe Villeneuve :

@Erik Romzek 

@Scott K.  Is correct when he says it's a little high.  Livonia and Redford are your starting points on our side of town (I'm a few miles south of you in Plymouth).  Eric, you can contact me anytime and I'll help you find what you're looking for.

Thanks Joe, I've trolled your posts for some months now.. would be very valuable to get your insight.  Check your messages.. thanks!

Erik

Originally posted by @Erik Romzek :
Originally posted by @Joe Villeneuve:

@Erik Romzek 

@Scott K.  Is correct when he says it's a little high.  Livonia and Redford are your starting points on our side of town (I'm a few miles south of you in Plymouth).  Eric, you can contact me anytime and I'll help you find what you're looking for.

Thanks Joe, I've trolled your posts for some months now.. would be very valuable to get your insight.  Check your messages.. thanks!

Erik

 Did and answered.

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