What are your buy and hold investment rules?

[Scott Wessels]

Hi All,

I want to know what your investment rules are for buy and hold investments, specifically SFRs.  I know about the 1% rule, 2% rule, the 50% rule etc...that's not what I'm asking about.  I'm trying to figure out what you use to be and stay successful in investing, so I can apply what fits to my investment strategy.

I want to know what your goals are for cash on cash return, cashflow per unit, ROI, or whatever you use to screen deals. Why do you use this rule? And how can other variables effect your decisions? Things like interest rate, purchase price, LTV, potential appreciation, property type.

Thanks in advance.  I hope this drums up some good discussion!

[Mike H.]

@John T. 

Sure. I buy all my houses using hard money. To me, this is the only way I know of to truly grow your portfolio without having a ton of capital - which I don't.

But I do have HML's that will lend 100% of the purchase plus the rehab as long as the ARV is under 70%. The only thing I have to do is come out of pocket for closing costs and their points/fees (4%). Obviously, this limits the number of house I can buy as finding deals at this discount is not easy. But its doable. I've got 30 houses (closing on 31 and 32 this month) that I've been able to buy with this same model.

LTVs right now are all well under 70% - because they had to be. And my average gross profit per house is right at 406 per month. I'm technically HIGHLY leveraged when you think of what I have into my deals. But when you look at my equity ratios (under 65% total), they're actually better than quite a few people since they are getting in all at 75% LTV numbers.

My typical deals are where I'm all in between 85k and 100k. So I'm paying 4k or so in points and fees plus another 1,500 or so in closing costs. But I'm getting back the tax credit to help offset some of that as well.  I still figure that tax credit as an expense and count it towards my 5 to 7k. And lets not forget that there some houses end up going over the rehab budget. So thats where I'm coming up with my 5 to 7k number out of pocket per house.  Lately, its been a little better. but still, thats the norm for me.

Once I rehab and rent, I then refi into a commercial loan with a local bank (5 yr balloon,20 to 25 yr amort, etc).

Here are the actual numbers off the hud statements on my last 2 deals (closed in July and Sept) and the one I'm closing on this monday.

1) Oct 20 closing on bradley house
Purchase - 63,829
Rehab escrow - 18,965
My earnest money - 1,000
I need to come to the table with - $734
I'm all in at 1,734. with an existing rehab loan of $82,795
Appraisal value - 137k
My PITI when I refi should be: 850/mo. Rent of 1250 to 1275 month.
Gross profit of $425/mo.

2) Sept Braidwood:
Purchase - 47,872
Rehab escrow - 29,680
My earnest money - $1,000
I came to table - $2,003
I am all in at 3,003 and have an existing loan of 77,500.
Appraisal value - 127k.  
My PITI when I refi should be: 850/mo. Rent 1275 to 1325.
Gross profit: 425/mo to 475/mo

3) July Braidwood house (anndon lane)
Purchase: 103,754
Rehab escrow - 17,000
My earnest money - $2,970
I came to table - $5,322
I'm all in at - $8,300 and had an existing loan of $119,000
I then refi'd at 125k and pulled a couple grand extra so my all in is really about 5,300 on this one.
House appraised out at 200k. (I don't normally do houses in this range but this
deal was too good not to take down)
My PITI is 1168. Rent is 1650/mo. 
Gross profit is 482 a month and my principal paydown is 320 a month.