Searching for the rental formula for success in my area

Rehabbing, Fix and Flip, Rental Properties
1

Investors,

I’ve done a lot of thinking on my own and I need some help to continue.

In my market I’m seeing a lot of opportunities for 2/1 SFHs as rentals. It’s a town with a very stable rental market. These rentals (2/1s) can go anywhere from 550 to 650/mo depend on amenities (w/d? dishwasher? pets? etc). I need to figure out what their purchase price should be.

I’ve never done this before and I want to structure deals where I can flip a few to other investors and then purchase a few myself for cash flow. I’ll put in the work to negotiate the prices, but I need make attractive investments. There’s a ton of these properties going up! I just need to figure out the formula and there’ll a lot of work for me to do providing rentals for cash buyers then acquiring my own later in the summer/fall. I need to figure out what my purchase price is… for me and for a cash-buyer.

Please include any input you have!

Here’s an example:

Gross Income 550 x 12 = 6600
Other Income 0
Total Gross 6600
Less Vacancy (10%) (660)

Effective Gross Income 5940

Expenses
Taxes 540
Insurance 300
Water/Sewer 0
Garbage 0
Electricity 0
Licenses 0
Advertising* 50
Maintenance* 600
Mgmt 650
Accounting/Legal* 100
Misc. 0
Gas 0
Telephone 0
Budget for replacements* 600

Total Expenses 2840

NOI 3100

Debt Service (P 55k, 3.5%) (3000)

Cash flow 100 =(

anything with a * I made up. This uses a total of $800 for mgmt costs and $1200 towards repairs and a budget for future repairs, both of which I made up because I don’t know what the experts assume.

I feel like I’m doing something wrong because I was once told you debt needs to be 50% of your GRI. Am I mistaken?

Any input on what a 2/1 rental cashflow sheet should look like? I want these to cashflow $2000/year.

I got one sitting on the deck at 55000 (no contract) and I’m looking at a couple others that I could negotiate to there or perhaps lower. If I knew what the price should be, then I would be able to negotiate with even more confidence and get the prices I need.

I’m stuck between wondering if I’m being too conservative but I do not want to mess up a deal or my reputation could bury me in this market. Something’s telling me the number is 35k.

2

In our market, we can get into a house for 30k or less that will rent in the $550 to $650/mo range. Our insurance and property taxes for these houses are similar to what you have listed. Our insurance is usually about $350-400/yr. Our property taxes are anywhere from $600 to about $1100/yr for our houses. Are these houses your finding move in ready or will you have to put a substantial amount of money into them to rent them out? If they’re not rent ready, you didn’t really list any money for the initial rehab. You also didn’t list anything for utilities. There will be costs to hook up electric as well as costs for electric used during the clean-up and make ready period before it’s rented. People using conventional mortgages may be able to get a low rate like 3.5%, but I’d plan on higher. I’m more used to seeing 5.5% or so now for commercial loans. Prior to this year, we were getting 6.5%, but these loans are for 10 yrs. Once again, conventional financing will be different than portfolio type loans.
We shoot for a purchase price where the monthly rent amount will be about 2% of the total purchase price and initial rehab. For your 55k price, you’re at 1% unless there is substantial money needed for rehab. I believe 55k is way too high if you want cash flow. The market sets the rent amount so the only thing left to do is get the price down.
The 50% you’re referring to is for debt service and cash flow. Look up other posts on here about the 50% rule. That will help.