My deal good or bad, 2% not possible in my area

6 Replies

Do people really get 2% on rent of the purchase price?  At least where I live there is no way this rule will work.A house that sells for a 130k (that doesn’t need any work) will get about 1200 to 1400 a month rent; no way would it ever get close to 2600k/month.  A 200k house will get 1800/1900 rent.  I just can’t believe there are places in the US where I can buy a 100k house and rent it for 2k dollars a month.

I just purchased my second rental home, my strategy is buy foreclosed homes that need minimal work; most of these are cash only sales "AS IS" fix them up and rent them out. I use my HELOC to purchase and fix up and in 6 months get a 30 year cash out mortgage and pay back my HELOC. I am an extreme DIY'er, I do most of the repairs, and will sub out major tasks (I work a fulltime job, and as I get more houses I will have more done). I self-manage, do my own advertising, leases, work, etc….. I only want to buy houses close to me (within 5 miles) so they are easy to take care of.Here is my last deal:

Paid $108000 for house (3 bdrm/2ba, 1450 sqft rancher, nice flat yard).

$2500 settling fees (don’t have exact amount just a guess)

$2250 in supplies to fix up

In six months when I get 30 year cash out mortgage another $2500 (guestimate) in fees for new loan.  I have signed year lease tenant moving in 30 days from purchase date on this property.

Total investment that will be on loan in six months when I get a 30 year mortgage to pay back HELOC is $115250; 30 years @5% (guess on interest rate) payment is $619/month.Taxes, HOA fees and insurance are $241/month. So my cost per month is $861 per month.

I am getting 1400/month rent on this property, which is the going rate for a property of this type in my area (I did tons of research on rental prices).  My profit (not accounting for expenses are $539/month).

I would love to make as much as I could but I just don’t see how it can be done in my area, basically if you were going to have everything done, and have a property manager you would not make anything in my area.  This house I got sold for 240k in 2008 and should appraise for about 150k now.

My plan is long term, just looking for some extra income when I retire in 15 years; I plan to get 10 properties.

I just wanted opinions on my deal.

Thanks

I can tell you that $539/mo Net Cash Flow in Dallas is a big, big win!  You're lucky right now, here in Dallas, if you are getting 1%.

Look, those 'rules' are rules of thumb.  There are places where you can buy house cheaply enough to make those rules work, Cleveland, Columbus and Memphis come to mind.  However, we don't all live in Cleveland, Columbus and Memphis.  

You are doing everything you can to maximize your profits by self-managing and doing the work yourself.  If you are happy with the cash flow you are getting, don't worry about the rules.

It sounds like you have a nice cash flowing property. However, have you added in anything for repairs, cap ex or vacancy? I typically am very conservative and add 10% for cap ex, 10% repairs. 10% vacancy and 10% property management. My expenses are typically not that high and I do have a low vacancy but if I can make a deal cash flow with those numbers I feel very comfortable. If you used those numbers you would be negative $20 a month. Now since you are managing yourself and can do much of the repairs your costs will be significantly lower. 

Hi Kevin, sounds like you are doing well and on a great path. Hattie is right, different areas have different returns and as you mentioned, you only want to stay within a 5 mile radius of your home. That's a smart idea too, to keep all your investments clustered. I invest in Miami and the properties I bought in earlier years, when the market was down are definitely achieving over the 2% in monthly rent. This year it's been almost impossible to achieve that return, with prices skyrocketing in 2015. I will not buy something unless it's got a minimum 15% net cap but ideally closer to 20%. I got lucky in the past couple of deals where I bought properties well bow market value. Anyway, congrats to you for your smarts and hard work.

@Kevin McDonald

Hello Kevin. You have an awesome strategy. If you can make the properties cash flow after you refinance, you are on the right track.

There are many markets in the US where the 2% rule is a fantasy. Generally speaking, the coasts of the US are more expensive and in the middle of the country you can find something close to the 2% rule. From my limited experience, it is often properties purchased for $40,000 to $50,000 that will rent for $800 to $1000 a month. I don't know of many people who are purchasing $100,000 properties that rent for $2000.

With your current strategy you should be able to make some money and acquire cash-flowing properties in your market. You have the benefit of refinancing your money back out on each deal, so that will allow you to add to your portfolio at a good pace. And because your properties are worth more and rent for more, you may be able to find decent tenants and build a good business in the long-run.

It sounds like you're on the right track. Keep up the good work.

Mike

Thanks for the advice/comments.  My plan is to not cash flow it at all right now, I will just keep all the profits to pay for repairs, months not rented, etc.....  I am really looking at long term plans.  Once I have a good nest egg to pay for a few months not rented and extra money for repairs, maybe at that point I will start taking out some of the profits.  

Thanks again. 

Kevin I think you misinterpret what cash flow means.  Making a profit means your property is producing cash(cash flow).  What you do with that cash is secondary to if it is cash flowing or not :)

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