Is there a formula for evaluating SF Homes for rental?
I am looking for what to pay for a property based on the rent and repair cost, etc.
As a rule of thumb, you can determine the MAXIMUM purchase price (for screening purposes) by dividing the monthly gross rent by .02
Good Luck,
Mike
So if I have a house that can rent for $600 month. My max purchase price should be $30,000?
I am assuming the max purchase price also includes any repairs. So if the house needed $5,000 in repairs, my max purchase price is $25,000?
Thanks for your help
Trae
Trae,
That’s right. Of course, you should also do a thorough cash flow analysis and all the other due diligence before buying.
Good Luck,
Mike
Though the return would be great, not many markets you’ll find the 2% number to work. I use a rough 1% (if rent $600, max price + repairs=$60,000) “first look” rule of thumb. Some people, probably still, are using .5% or less ($600 rent, max price $120,000), even if it cash flows negative, in hopes of getting appreciation over time or of having such awesome tenants landlording becomes a pleasure (dream on!).
Instead of just looking at price, if you creatively structure your deals (low and/or spread out down payment, seller finances you, etc.) you can end up with some decent cash-on-cash returns. Just be sure you factor in taxes, insurance, utilities, all the expenses or you may end up with a money pit.
bottomfeeder,
The fact that it is difficult or impossible to find a property that will cash flow in a given market is totally irrelevant. It either cash flows or it doesn’t. I have never seen a property that will cash flow with gross rents or 1% of purchase price. If you’ve seen a property that will cash flow at 1%, please post the numbers.
Mike