What Formula Makes a deal good?

3 Replies

I'm Pretty new to being an investor and have been studying the numbers game. So this may sounds stupid however I don't get it should be simple right? Whats the simplest  formal or example of a break down oh how the numbers look on a rental for either a signal family or duplex for a Purchase to rent and hold, Like a quick glance to see if the house is worth perusing?

@Mark Norris

This is just some basic rule of thumb but you should at least be able to get a 1% rent to price ratio meaning buy for $100k and rent of $1,000 minimum. 

Other people will also take into account vacancy and repair allowances, say 8% each per month. Then there are investors who want to also figure in CAPEX at say 10%.

You personally need to determine what amount of monthly cash flow you are looking for either as Gross cash flow or NET cash flow.  I can tell you that when you start to take vacancy, repairs, capex, etc... into the equation it makes the figures look worse.  

Some ROI or cash flow goals can only be met if you do this on your own. If you consider buying from a TK provider you can forget about it if you factor all those expenses in.

Good luck

I feel there is no one formula.  I only have one property that met the 1% rent to price ratio when purchased.  However the equity in my 10 rental units (5 properties) probably went up $300K so far this year and all have positive cash flow. 

Another thing that I do not like about the 1% formula is it provides no value to the cost of the money.  Interest rates have a big impact on cash flow for buy and hold investors.

So if you are in an area where there can be expected to be significant increase in property values there should be less emphasis on the cash flow.  Your profit will be partially derived from the equity increase and being able to access that value for further investments.  If you are in an area that real estate prices are stable and not likely to increase much then greater emphasis must be placed on cash flow as that is where you will make your profit. 

Cash flow has quite a few variables: rent, interest on funding, maintenance costs, occupancy rates, LTV (i.e. amount borrowed), etc. Also if your LTV is below 70% you likely have some money that is not doing much to help make you money (i.e. could probably be invested better).