Purchase Price

I’m looking to make my first purchases of various rental properties. However, all of the formulas I’m using ( Cap Rate, 2%, rent x 50) produce purchase prices approximating, on average, 75% of the asking price. What prices are all of you actually buying your properties for? The properties I looked at ranged from single family to 8 units. I live in the rural midwest, below average income and massive rental demand.

I don’t have an answer for you, but this is the information I am looking for too. Where did the formulas you qouted come from? Any help is appreciated.

I got those formulas from my research (books, blogs, even this website). I got a ton of great books from my local library. It just seems like most of the suggestions are simply too conservative. I can be more specific if you like.

Normal sale prices are based on supply and demand. Houses in general are sold for what the market (good or bad) will bear. The rules of thumb you mention for determining purchase price are rules of thumb for INVESTORS buying INVESTMENT PROPERTY, not the average Joe buying a house to live in. Most investors must purchase significantly below standard retail price if they intend to actually make a profit. In my experience (and in my area), finding those properties that will sell for significantly below market price is the hardest part of investing. Again, in my experience, you don’t find these properties on the MLS or via a real estate agent (although other investors in other area may have better luck with the MLS and agents). Most of the properties I have bought have been directly from owners that get caught up in one or more of the 6 "D"s (death, divorce, disease, disrepair, drugs, and dumb) and NEED to sell the house. I go out and FIND these houses and also advertise so these houses come to me. The last property I bought was a 3 BR/1.5 BA rancher in a nice neighborhood. It had been neglected for 30 years before the owner died and I bought it from the estate. I paid around 40% of ARV but had to put $30K of materials and 7 months of work into it to bring it up to my standards. I now have about $90K in equity in the property and rent it at a good price for its market.

Other areas where there is less competition and better rental rates might allow an investor to pay more for a property than I would. The price you pay ultimately depends upon how comfortable you feel in your ability to make a profit as well as the potential for price appreciation (or at least price stability).

Along those lines, you might want to do some research on the real costs of owing a rental property. It is generally much more than just the PITI. Those rules of thumb take into account the hidden costs which is why they seem so skewed.