Robert Allens advise for buying rentals

I have a book of Robert Allens and he says 1% of the sale priceis a good amount to collect for rents. Example { 100,000 house should collect 1000. This is not what you investors say. You say 1000. rents only pay 50,000. I am kinda confused. Will both ways work. :banghead

You should collect enough rents to cover your expenses, allow for maintenance/repairs, and make a profit.

1% is a surefire way to negative cashflow. 2% is much better gauge for positive cashflow. 50% of the gross rents will invariably end up going to expenses, the other 50% will cover your principle and interest, anything left after covering your P&I is your profit. Expenses include but are not limited to: Tenant damage, garbage pickup, sewer and water, appliance repair, wear and tear, carpet and paint between tenants, evictions, lost rent during eviction proceedings, regular vacancies, snow removal, landscaping, lawsuits, insurance, taxes, etc, etc, etc. Just because a landlord currently has only a few hundred bucks a month in expenses it doesn’t meant this is what you can gauge your numbers by. Lawsuits, evictions, tenant damage, etc come up unpredictably and can add thousands at a clip to your annual expenses. These numbers should not be ignored. The 50% figure allows you to quickly and accurately build in plenty of cushion to keep you in the black no matter what comes along.

The “1% rule” is a general “rule of thumb” traditionally meant to ensure profit but in this day and age it is often too tight to ensure immediate profit. You need to consider variables of the property condition and location as well. How old the property is in terms of the maintenance it will need is a good place to start. What’s the traditional turnover rate in your area? (It often costs more to get a new tenant than keep an old one). You also need to allow money for the property to be vacant especially in the beginning. Are you going to use a property management company? If not, are you familiar with the landlord/tenant laws in your area?

Also use extreme caution if you are buying a property that’s already tenant occupied (even if the very nice current owner shows you the records of all of his/her “rent receipts”).

I do not mean to discourage anyone but please educate yourself before purchase.

Rental properties often cost more than one thinks, especially in the beginning. Of course the good news is that someone else is paying down your debt and you’re getting the tax benefits!

That 1% is the difference between a guru selling a course, and the numbers given by those who actually are doing this for a living.

Every post has to turn into a guru bashing match?

In general, the market rent is around 1% of the ARV as long as you are within a certain price. Now, you should always buy for MUCH less than the ARV if you want to make it a business.

If the advice sucks, yes. Not all gurus are bad but many of the priniciples taught out there on the guru circuit suck. If something is posted here that contradicts what I know to be right I’m not going to bow down before it because some guru preaches it. I think we as forum members have a responsibility to the posters here to give them the truth. They can listen to what I say, listen to what a guru says, and decide what the truth is and how to apply it to their life. If the poster thought Allen was the gospel they would have just read it and applied it, they wouldn’t question it here.

I’ve learned not to believe everything I hear too, but that goes both ways. I have not listened to Robert Allen make that statement, but it strikes me as an odd thing to say and I would first question that it is what he means or if it was to the speech was to the general public vs investors.

As a general rule of thumb, rent runs around 1% of ARV to cover PITI (most of the time PITI is 1%). Now this of course does not cover all the other variables such as maintenance, vacancies…etc. but average joe who just wants to buy a rental won’t know and probably won’t care since they are simply investing to have a free and clear house in 30 years and may not mind dumping the money in it. They do not plan on living in it, they want the tax advantage, and a way to increase their money by riding the appreciation over the years.