I have been reading allot and I keep seeing this 2% rule for buying rentals. Its supposed to be no house that doesnt rent for less then 2% then the purchase price right? Example I buy a house for $75000 I would need to be able to get rents of $1500 monthly right? Does this figure include down payment? Meaning I buy for $75000 and I put down 10% so I finance $67500 I would need to rent for $1350 right? I have been having big problems finding properties like that. Most SFO homes I see (even in less desirable areas and need work) go for 70K and cant get more then $900 a month. Any suggestions on this? Thanks I really respect the advice I get here.
Hugh,
The rents should be 2% of the acquisition cost (purchase price + rehab cost). The amount that you put down really has nothing to do with the quality of the deal because there is an opportunity cost to the money you put down (i.e. lost interest, etc).
What have YOU been doing to find rentals that will meet the 2% rule?
Mike
well i have been looking at hud homes, bank owned homes, and fsbo in the paper. I know i should be running ads and screening leads but not sure im ready for that. Not seeing anything in the 2% range in these places yet but havent been looking that long either. I was thinking about churches recently and how many people must leave there homes to churches. That may be a great place if I can work out a deal with them.
One thing to keep in mind. People will ask whatever they want for a house. You only pay what you want to for a house. You will not get every deal, but make sure that every deal that you get is at the price you need it to be at. In other words offer what you want to get it at. If they say no then you don’t get the house but then again you don’t want it at the higher price anyway. I wanted every house I bought really badly at the price I offered. When the seller said he would not come down to my price I didn’t want it at all at that price.
Think of it like when you were single. There were millions of ugly women that were dying to marry you, but you wanted to marry someone pretty. So those houses that are too expensive are just like those ugly women chasing you. You don’t have to marry every woman that proposed to you and you don’t have to buy every house presented to you. They can salivate all they want but you are holding out for the cute women, and cheap houses.
Bluemoon,
I must have been the ugly man, because when I was single, I never had a woman chase me, much less propose.
Me to. No girls are chasing me… jesus i must be ugly. wut u guys think?
www.myspace.com/hoosierluv some pics there.
hahahahahhaha
Guys women don’t chase you because you look good…they chase you because you make money or are going to make money in the future. The women that want to be married to football players chase football players not good looking football players. When I was in college the girls that wanted to be married to a corporate executive whould chase the guys they thought would end up being executives. I just happened to be good looking also.
hahahahahaha thanks for the wisdom bluemoon. The very end of what u said was funny as HELL.
Why would you use a concrete rule when you have so many different variables going into your expenses. Taxes are different on every property, Insurance can vary, don’t be lazy on your investment and do the quick cash flow calc.
Oh trust me I dont want to be lazy about it. My father has a few small condo units he rents. With his turn over and updates I dont really see him making money, just a return on his cash flow. Kind of like interest in the bank. I have allot of passion regarding real estate and want to make sure I know what im doing before getting over my head. SO lets say I calculate expenses such as taxes,water,ins,mort, ect. How many months rent is a good guess for vacancy? I know it depends on the area and the property but maybe what would be a good general figure to use for calculations? Thanks.
I use two to be conservative…
Yeah that sounds right. One thing my father doesnt do well is screen. He basically takes the first yes on section 8. Thinks its guranteed but then always has problems. I think he just picks the wrong people, nothing against section 8. How the hell do these people have 1st last and security?? Oh yeah they didnt pay the last guy for 4 months.
They didn’t pay the last guy so they could buy a brand new car to cruise around in. It’s sad our tax dollars help fund stupidity.
Don’t get me started on gov’t assistance…It’s a necessary evil. You give people money so they keep their problems in their own hands. If we didn’t give assistance, they would steal to survive. Sad but true.
Why would you use a concrete rule when you have so many different variables going into your expenses. Taxes are different on every property, Insurance can vary, don't be lazy on your investment and do the quick cash flow calc.
I use the 50% expense rule because it is IMPOSSIBLE to determine the actual expenses for a given property and a given year.
How many months rent is a good guess for vacancy? I know it depends on the area and the property but maybe what would be a good general figure to use for calculations?… I use two to be conservative
That’s my point. You don’t have a good number for vacancy, so you just made one up. You didn’t do that because you are “lazy”, but because accurate information is not available. If you can’t even put an accurate number to a basic expense such as vacancy, how can you be accurate with legal expenses; damage done by tenants in excess of the deposit; eviction expenses; lawsuits; etc. Of course, the answer is that you can’t.
Therefore, I believe the best solution is to use a number based on REAL DATA from hundreds of thousands of rentals throughout the United States. The fact is that throughout the United States, operating expenses run 45% to 50% of gross rents.
Good Luck,
Mike
I just read your e-book and it was very informative. Looking to start purchasing rentals this year.
BTW, when u use your 45-50% expense number, is that the same whether it’s a SFH, 4 plex or bigger?
Propertymanager
Are you including vacancy in your 50% expense calculation?
Yes
Mike
PM,
I just read your e-book and it was very informative. Looking to start purchasing rentals this year.
BTW, when u use your 45-50% expense number, is that the same whether it’s a SFH, 4 plex or bigger?
NJREStudent,
Yes, the 45% to 50% expense number is the same regardless of the number of units.
Mike