Any advice for a deal which fails the 2% rule?

Question

a close friend approached me yesterday with a possible rental deal.  He knew I was in the process of finding my first property and he asked if I'd join him on this deal.  We went over the numbers, some are based on last year's data and some are estimations.  I will lay it all out below and hope people can offer advice.   It's my first deal and while this one passes the 1% rule(barely), it doesn't pass the 2% rule so that gives me pause.

Facts or numbers based on last year:

Purchase price is $182k (didn't yet negotiate). I should say, this is a rental in a college town and a rental for students(6 bed - 2 bath).  It's about 8 blocks from campus and 2-3 from some popular bars.  It is already rented next year.  I saw pictures of a few properties he visited, this one isn't very updated but by far nicer than the other 5 he showed me.  We may want to paint a little or something but there isn't much needed for renovations.

$1,100 annual property taxes.

$250 insurance.

$24,000 annual rental income, rented a year at a time with $12,000 paid before the fall semester and $12,000 upfront for spring.

Estimated numbers which we hope are accurate or too high:

4.3% 30 year mortgage for 80% of the purchase price.

$9,000 closing costs.

$1,500 per year in repairs/maintenance.

$3,600 per year for electric/water/sewage (they pay heat/cable)

$400 put aside each year for future capital expenditures (should this be higher?)

That's it.

We aren't sure about hiring a management company but we will obtain pricing and then make a decision.

We also didn't know how to factor vacancy rate.  The two story home rents for $12,000 per semester and can sleep 6, but if only 5 students live there the rent is still $12,000.   Also the $12,000 is paid in a lump sum twice per year, not monthly.  What do you suggest we do to error on a conservative side?

Thank you to anyone willing to help crunch these numbers or offer advice!

Jay Hinrichs · Answer

student housing will cost you far more than your thinking.. on turnover and cap ex.  only place that would not be true is student housing at Brigham Young.

Joe Villeneuve · Answer

2% and 1% are numbers that are best used to describe milk...not real estate.  Don't tell me they are rules of thumb.  It takes less time to actually analyze a deal/market with actual numbers than "guesses".  Using these % (any analytical %'s actually) assume all properties are equal...which they are not.

Using these "shortcuts", and rationalizing their use as being "rules of thumb", is just being lazy.

Luka Milicevic · Answer

2% rule is a rule of thumb. It's not a be all end all.

I have 1% properties that are cash flowing very nicely.

It also depends on your goals as well as your area. California investors probably consider 0.2% a deal. (from what i've heard).

If it meets YOUR goals then it's a deal for you.

Joe Villeneuve · Answer

No

Marty Gold · Answer

Must these comps be rentals?

Thank you

Alan Grobmeier · Answer

I thought those ppl at BYU were loose and party animals.  Now I find out that they pay their rent on time as well.  ;-)

Joe Villeneuve · Answer

Most of what you are looking for can be found in the sellers records.  Get them from the seller.

ARV = Sold Comps in the immediate area, same size property.

Taxes = public record

Insurance =  Call an agent and ask

Closing costs = Call up Title company and ask

Mortgage = calculate out based on DP/Loan/and terms from your lending source(s)

Utilities you pay = Seller should provide the last year's bills to you

Rents = Seller should provide a rent roll showing rents, paid on time or not, vacancies, etc...for at least the last year, and should be for any long term tenants

PM = can provide you with rents in the area, as well as do an inspection of the property to give you recommendations of what needs fixing/upgrading

Rehab = Get ACTUAL numbers from a rehabber

Thomas S. · Answer

2% rule is only used to initially determine if a property is of interest.  At 1% it may still be worth investigating depending on your market.

To get the real costs put the property under contract with a no cause escape clause. Obviously you will be offering less than asking to begin.

I would not purchase unless the plan is to transfer all utilities to tenants. IF not it is a no go with my investment policy.

Marty Gold · Answer

How can I know some numbers though?  Not all costs are fixed and thus, must I not take an educated guess or approximate some costs?

If you can direct me as to how I can get you more solid numbers, I will do that and edit my OP.  This is my first rental purchase and I'm not familiar with all the specific details yet.

Thank you

Joe Villeneuve · Answer

Sorry Marty, but as I try to follow the numbers I see too many numbers that are "ifs", and "hopes" (your own words).  I have no problem giving you an opinion, with reasons, but I'm not sure I can given the vague info you have given here.

Any advice for a deal which fails the 2% rule?

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