50% rental rule question

[Rich_in_CT]

Someone a long time ago - who had never owned rental property - said that a property should rent for 1% of the property value per month (or something like that).  IMHO that is just as disconnected from realistic market factors as the 50% rule we are talking about.

I agree, 1% puts you nowhere near cashflowing using 50% expenses.  2% puts you closer to that 50% mark.

[propertymanager]

 

IMHO that is just as disconnected from realistic market factors as the 50% rule we are talking about

You can say anything you want, but the FACT is that throughout the United States, operating expenses run 45% to 50% of the gross rents.  That has been established through surveys of the owners of literally hundreds of thousands of rental units by the big landlord associations.  If anything, that number is probably a little low for small mom-and-pop landlords, because inexperienced landlords make a lot of expensive mistakes that more experienced landlords don't make.

I hear the claim all the time by individuals who have only a few units that their expenses are lower, but almost without exception they are simply ignoring many of the expenses and paying them out of their pocket.  Kind of reminds me of the government, which spends money that is "off budget". 

[yrush2000]

And Carlton Sheets still promotes $100 income per door.  What happens when you have a 4plex with $2500 a month mortgage??? $400 a month does not cover the vacant door to long..

Iron..
I know rental suck in my area, which is why I have to go the route of rehab and flip or L/O.  But sometimes I grab a rental because of cash I can get in the buy, but not looking to sell it right away.  I can use the cash as infusions for rehabbing and holding cost at times.    
Yesterday I signed 3 contracts for condo.. Asking price 80K, Appraisals 145K, complex in final stage of 10mil renovation. Will increase each unit by 5-10K in value or more.   Units all rented for 845month.    I decided to jump on them for certain reasons..
1) With 10% downpayment and Option ARM with no major expenses or vacanies I will cashflow about $50 a month (not alot) Long term older tenants all in unit over 4yrs and not planning on moving.
2) Prices will go up on these condo, since they are selling way below value for being on a golf course and the renovations because complex was in need of overhaul being done.  once sales happen in the 150-160K range, comps can get higher and maybbe in 2yrs be worth 200K if taxes get fixed in Florida.
3) No money out of pocket except $1000 per unit in escrow(creative financing for the 10% down to use option arm loan) and $39,500 cashback on each condo ..and walking away with it from closing table..  

Now I have 118,500 more in bank.  That alone can carry these condos for a long time.  Plan to set aside about $30,000 for these units in Money Market/CD accounts collecting 4-7% interest combo..

Take the other 90K and use it for rehabs as downpayment/funds/holding to flip..  I know I can turn the 90K into 200K in about 1yr with 3-5 rehabs..  Plus equity in the properties.. and still carry reserve...

Not meant for longterm hold though unless I see market go strong again, plus I know I can raise rents to about $900 a month on renewals with the renovations..

Thoughts????  Very bad move, risky, never do it, or just not you.

[Brewer]

Mike or Iron Horse,

Just because "your area" will not support rentals, why not go out of your area?  I am located in CA where cashflow is near impossible to find, but I can find it in other parts of the state.

What are your thoughts on out of state rentals?  Thanks.

Cheers,
Brewer

[propertymanager]

And Carlton Sheets still promotes $100 income per door.  What happens when you have a 4plex with $2500 a month mortgage??? $400 a month does not cover the vacant door to long..

yrush2000,

Vacancies are included in the 45% to 50% expense number, so the $400 per month cash flow does not cover the vacancy.  The vacancy is covered by the expense allowances.  You will note that the 45% to 50% expense number is a long term average (or the average with a large number of units).  You are at the highest risk when you only have a few rentals because one big expense will not be offset by your expense allowance.

If you own only one rental and it goes vacant for June, your vacancy rate for June is 100%!  Should you conclude from looking at that one rental for one month that the vacancy rate for rentals in your area is 100% and therefore you should never buy another rental.  No, that's ridiculous, but that is exactly the way a lot of people treat their rental business when it comes to expenses.  They only include expenses that they know will happen this month and ignore the reality of the situation.  If you want to be successful over the long term, you've got to base your expense numbers on the long term reality and include all the expenses.

Brewer,

Personally, I would not do long distance rentals.  The management and maintenance expenses can be much above normal and can eat away your cash flow.  If your goal is to own a rental business, I would move!  Rentals are much more profitable if you can do the management and maintenance yourself or at least directly oversee these tasks.  Would you live in California and start a new hardware store in Ohio?

Mike
       

 

[Rich_in_CT]

Iron..
I know rental suck in my area, which is why I have to go the route of rehab and flip or L/O.  But sometimes I grab a rental because of cash I can get in the buy, but not looking to sell it right away.  I can use the cash as infusions for rehabbing and holding cost at times.    
Yesterday I signed 3 contracts for condo.. Asking price 80K, Appraisals 145K, complex in final stage of 10mil renovation. Will increase each unit by 5-10K in value or more.   Units all rented for 845month.    I decided to jump on them for certain reasons..
1) With 10% downpayment and Option ARM with no major expenses or vacanies I will cashflow about $50 a month (not alot) Long term older tenants all in unit over 4yrs and not planning on moving.
2) Prices will go up on these condo, since they are selling way below value for being on a golf course and the renovations because complex was in need of overhaul being done.  once sales happen in the 150-160K range, comps can get higher and maybbe in 2yrs be worth 200K if taxes get fixed in Florida.
3) No money out of pocket except $1000 per unit in escrow(creative financing for the 10% down to use option arm loan) and $39,500 cashback on each condo ..and walking away with it from closing table..  

Now I have 118,500 more in bank.  That alone can carry these condos for a long time.  Plan to set aside about $30,000 for these units in Money Market/CD accounts collecting 4-7% interest combo..

Take the other 90K and use it for rehabs as downpayment/funds/holding to flip..  I know I can turn the 90K into 200K in about 1yr with 3-5 rehabs..  Plus equity in the properties.. and still carry reserve...

Not meant for longterm hold though unless I see market go strong again, plus I know I can raise rents to about $900 a month on renewals with the renovations..

Thoughts????  Very bad move, risky, never do it, or just not you.

I like it.  You ended up with enough cash to carry a $300 a month negative cashflow on each for 11 yrs.  If you only have to carry that for 5 yrs until the market rebounds you keep whatever is left in the bank plus whatever you make on the appreciation.  In most cases without getting a real big pile of money like you got I'd say you're a fool, but since its enough to carry a large deficit for a long time I'd say you will make out ok on this one.  Well unless those fantastic FL taxes and insurance doesn't tank your fund.

[Iron Range]

Brewer,

I invest in two states (MN & WI).  It works out pretty good for me.  I need to invest in properties that cash flow. If that means investing a couple of hours away from home, then to me that is ok.  If you invest in your area and it has a negative cash flow, then you know for sure you messed up. 

I wouldn't invest in Ohio if I lived in California.  But I would invest two or three hours away.  If we are talking about larger apartments that you aren't going to manage, then I would invest in neighboring states. You can't limit yourself to ONLY your area if you want to buy mid to large apartments.  There's just not enough of them to limit yourself to a small area. But even with large apartments I wouldn't want to invest half way across the country.  If you have to drive a couple hours, then that's what you have to do to make it in rentals.