buy-to-rent ratio question??

Question

What buy-to-rent ratio makes it worthwhile for an end buyer looking for rental property to jump at the offer? This will most likely be out of State property, just FYI. Sorry, I don't mean to be vague here, just trying to see what response I get back on this question. I may have an opportunity to put several properties under contract for higher than the what seems to be 2 to 2.5% of purchase price suggested by many folk here on BP. Thanks

Chuck Catchings · Answer

Thanks Brandon & Jon for the feedback. Just FYI the properties I'm talking about will be in the shale oil field boom areas that are just getting ready to start up. If these follow suite with what happened in Williston,N. Dakota they will rent up to 5% of purchase price. I'm doing some research on this but if your interested I will keep you in the loop. Some of these homes are as low as $25K setting on an additional 1 or 2 lots.

Jon Klaus · Answer

Chuck, I think it depends on the quality of the property and the area.  I've heard of deals that should return 3-5% per month, but the areas are somewhere between questionable and terrible.  Once and a while I've found a 2.5% deal that is a decent property in a decent area. However, with the market coming back, these are now very rare in my area.

Rentals that give 2-2.5% monthly in a good area can be great investments.

Brandon Turner · Answer

I know I hate to give this answer - but I think it really depends. I try not to rely on the 2% formula, but look at the 50% rule and cashflow to make my determination. Like - if its a house that will rent for $1000 per month  and the 50% goes to expenses, and the mortgage is $400 per month - then I know I'm going to probably get $100 in cashflow and I might pursue it further.

Anyone else have a thought?