How important is it to follow the 50% or 2% rule.

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How important is it to follow the 50% or 2% rule.

Nate Wilson
Weare, NH · Member since 2016 · 59 posts · 23 votes

Hi II am a newbie and looking for some advice on a property in Wear Nh. There is a duplex for sale for just under 200k. It generates $2000 on rental income and according to the calculators mortgage, taxes, and insurance would cost around $1000-$1200. Now I know this generates 1% income of the sale price and the 50% rule I would make a couple bucks. But I don't see who I couldn't make money off of this property. In a "perfect world" I would make $9600 to $12000 profit a year off this unit. I understand that will probably never happen. The house was built in 1980 and just recently renovated so everything is in good working order. Has a drilled well, plowing I can do myslef. What other expenses would I have? I understand things break and need to be replaced. I Am not looking to get rich ( it would be nice) but even if I had to dump $5000 a year into it that stil leaves me with $4600-$7000 yearly profits. 

Am I stupid for thinking this way or is everyone out to make the big bucks. 

Also on a side note I would rather deal with more middle class people than lower class, I have seen a couple triplexs in the Concord and Manchester aera that would probably generate more income but I feel like duplexes would bring it better renters. Any advice on this would be helpful 

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Marc Santos
Investor · Lincoln, RI · Member since 2015 · 11 posts · 8 votes
10y
I typically plan for 5-10% vacancy but you may be able to find some data specific to your market. Also, are these units metered separately for water? It's customary here in RI for landlords to pay water mostly due to the fact that most multi unit buildings only have one water meter. Also, if you're paying $1200 per month in Piti then you're already at $14,400, add in some vacancy ($1,200) and that already brings you down to max potential cash flow of $8400. Trust me, you will spend some money on repairs and maintenance of you truly track those costs. A good rule of them is anywhere between 4-12% of gross rents. Even if you plan on 4% this still another $1000 approx. finally, don't underestimate the cost of turnover (in my opinion the most costly expense). Paint, new carpets, a few random repairs, pay a realtor to rent it for you, change locks, key copies, paying utilities while vacant, cleaning, etc etc etc can easily add up to $1000s of dollars.
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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    10y

    The specific number isn't important, just the concept.  Make offers appear derived from detailed research.  I never offer round numbers.

    1Reply
  • Assata Moore
    Investor · Chicago, IL · Member since 2015 · 40 posts · 24 votes
    10y
    Originally posted by @Nate Wilson:

    i would like to thank everyone that has posted on this forum. All this information is extremely helpful. I understand that really doing my homework and research needs to be done to figure out the right deal. 

    I am looking to just manage one property. I know you have to plan for the worst and hope for the best but how often do you find the place trashed by renters or circumstances where caused an abnormal amount of damage to the property? 

     I've been dealing with renters in Chicago for over 10 years and have never had that to happen.  It should be noted, I deal on the south side of Chicago.  My last tenant left the place so clean it looked like she hired a cleaning service.  However, things are always different for a myriad of reasons.  With that, this seems more like a long term investment that can eventually be a great income producing property.  It's extremely important to save any proceeds for the first year or two.  That way, when something does happen, it will be business as usual and not a burden.  Good luck!

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  • Nate Wilson
    OP
    Weare, NH · Member since 2016 · 59 posts · 23 votes
    10y
    Originally posted by @Assata Moore:
    Originally posted by @Nate Wilson:

    i would like to thank everyone that has posted on this forum. All this information is extremely helpful. I understand that really doing my homework and research needs to be done to figure out the right deal. 

    I am looking to just manage one property. I know you have to plan for the worst and hope for the best but how often do you find the place trashed by renters or circumstances where caused an abnormal amount of damage to the property? 

     I've been dealing with renters in Chicago for over 10 years and have never had that to happen.  It should be noted, I deal on the south side of Chicago.  My last tenant left the place so clean it looked like she hired a cleaning service.  However, things are always different for a myriad of reasons.  With that, this seems more like a long term investment that can eventually be a great income producing property.  It's extremely important to save any proceeds for the first year or two.  That way, when something does happen, it will be business as usual and not a burden.  Good luck!

     Thank you for sharing your experience! I am glad to hear that you have had good luck with your Tennant's. What types of neighborhoods are your rentals in?

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  • Ryland Taniguchi
    San Francisco, CA · Member since 2015 · 786 posts · 717 votes
    10y

    Depends on the area. In high appreciating areas, you maybe happy with the 1% rule or as best you can get. We combine the 70% of ARV minus construction costs and the 1% rule for our BRRRR strategy.

    The 1% and 2% definitely help filter deals quicker. 

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  • Paul Strauss
    Wholesaler · Melbourne, FL · Member since 2010 · 72 posts · 59 votes
    10y
    Originally posted by @Marc Santos:

    Hi Nate

    What are your taxes, insurance, any utility bills, repairs account for at least 5% of gross rents, vacancy, landscaping. I've found that expenses almost always run right around 50% of gross rents. Don't fool yourself by thinking there will be little to no repairs because it's recently been renovated. Good luck!!

     Great point.  It's important to have reserves.  I don't know if there's a "rule of thumb", but for me, the smallest reserve amount we keep is our insurance deductible ($2,500 in our case) + 3 month's vacancy-- enough to carry the property without a tenant for 3 months- or about $5K - $6K for each rental.

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  • Paul Strauss
    Wholesaler · Melbourne, FL · Member since 2010 · 72 posts · 59 votes
    10y
    Originally posted by @Assata Moore:
    Originally posted by @Nate Wilson:

    i would like to thank everyone that has posted on this forum. All this information is extremely helpful. I understand that really doing my homework and research needs to be done to figure out the right deal. 

    I am looking to just manage one property. I know you have to plan for the worst and hope for the best but how often do you find the place trashed by renters or circumstances where caused an abnormal amount of damage to the property? 

     I've been dealing with renters in Chicago for over 10 years and have never had that to happen.  It should be noted, I deal on the south side of Chicago.  My last tenant left the place so clean it looked like she hired a cleaning service.  However, things are always different for a myriad of reasons.  With that, this seems more like a long term investment that can eventually be a great income producing property.  It's extremely important to save any proceeds for the first year or two.  That way, when something does happen, it will be business as usual and not a burden.  Good luck!

     It's funny how that works, isn't it?  My worst tenant was in Naperville / Aurora- and was a doctor with an 811 credit score.  My best tenants were in Englewood.

    0Reply
  • Assata Moore
    Investor · Chicago, IL · Member since 2015 · 40 posts · 24 votes
    10y

    Nate, I usually buy in the 60617, 60649, 60615 areas of Chicago. I follow where the city is investing, usually distressed communities. I also either live or work where I buy. My latest project is directly across the street from me. However, I valued the property at 135K ARV, Do Hard Money valued it at 150-160K and denied giving me the loan because of "high crime" area. All the numbers were great! Very interesting that someone from Utah would be able to tell me about a high crime area, also very disappointed in working with them. Non the less, I purchased it cash, am doing the repairs and will rent and refinance when I'm done in the next two months or less. Looking for the right company to do the refi now. BRRRR...

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