What criteria do you set for screening rental properties?

Question

I see a lot about the 1-2% rule, 50% rule, plugging in maint/capex/insurance/vacancy numbers, etc. But I've seen very little on the specific criteria that investors are using to search for rental properties.

For example, are you searching for $100k SFH that rent for $1500? $200k duplexes that rent for $3000? Apartment buildings that bring in x per unit?

The only specific advice I have seen on this is from Morris Invest, who recommends to buy $40-50k SFH at $700 rent. Though I don't completely trust him based on the bad reputation of his turnkey company.

So, what specific criteria do you set when looking for good properties?

Crystal Smith · Answer

Putting that aside, I'm looking for info on how you screen for good properties. I'm sure you don't look at every single property in the city. You have a certain price range, with a certain rent range. You have specific goals in mind. That's what I want to know about.

@Tyler D'Alessandro  Our criteria for good property changes every year.  At the beginning of the year, we establish a hurdle rate, which is usually based on beating the S&P 500 or some combination of indices.  The rate we established for 2019 was 16.5%. We apply that criteria to small multiunits (4 or less) or commercial properties.  (We don't currently purchase single families)  We've invested in tools that quickly allow us to evaluate if a property may meet that one single criterion.  Some years the rate we established was as low as 6%.

I know there are lots of rules of thumb on this and other forums but the bottom line is you have to determine what minimum rate of return you want from your investment, then work to find assets that meet that criteria.

Jonathan W. · Answer

@Tyler D'Alessandro marketability. If I had ten homes I wouldn’t choose all three story homes with no backyards. It depends and run the numbers.

I’d avoid small lots that sell a lot.

What can you make in rent? How much are you going to pay for it? How marketable is it?(Is it a 3 bedroom with a cute backyard and decent appliances or is it a five bedroom home with no yard?)

A lot depend on the area. Decent size lots with decent size homes for a good price. Vague ? Yeah it is but they appreciate well, normal houses that is

Kenneth Garrett · Answer

@Tyler D'Alessandro

If I’m in the sfh market; criteria is 3/1 around 110K all in.  Rent range $1400-$1600.  I buy with private lenders where they fund the purchase and rehab.  Using the BRRRR strategy the goal is get all of your money out.  Cashflow minimum $300/door.  If I have money stuck in, the goal is to recoup it within two years so that would be 50% return.  Normally it’s about 15 months.  If I were to have money stuck on a longer term I would want at least a 20% CoC return.

Hopefully this answers your question.

Tyler D. · Answer

I'd say it's very relevant. A good deal is a good deal regardless of who is buying it, because we are talking about numbers. Nobody is going to look at a 30% CoC return and say "You know what? that might be a good deal for you, but not for me.

Putting that aside, I'm looking for info on how you screen for good properties. I'm sure you don't look at every single property in the city. You have a certain price range, with a certain rent range. You have specific goals in mind. That's what I want to know about.

Tyler D. · Answer

Sure, they might be local. These examples are still useful, though.

Kenneth Garrett · Answer

@Tyler D'Alessandro

Depending on your strategy it depends.  If your buying with 20%-25% down, will the property cash flow and can I borrow the remaining funds.  Can I pay cash with my money, or other peoples money and refinance it (BRRRR strategy).  At the end of the day the cost of the property and whether the rent is $1000, $1500, $2000 is irrelevant.  The question should be based on the factors you had mentioned will it cash flow and can I refinance it, depending on your strategy.  I like to tell people the asking price for a  property is meaningless.  What does matter is what you are willing to pay for a property.  A good deal for me might be a terrible deal for you.  It’s all relative.

Good Luck.

John Warren · Answer

@Tyler D'Alessandro part of the reason you don't see much of this is because these criteria are incredibly local and will carry less value here on BP since this is an international platform. I can tell you that here in the Berwyn area I recently bought a 19 unit for $57,000 per door if that helps. The average rents for 1 bedrooms runs $900 per month, and the average rent for the 2 bedrooms runs $1150 per month.

I also picked up a six unit in Cicero, IL recently for $47,500 per door. The rents are lower at $900-1000 per month for the 2 bedrooms.

The thing is, this information still isn't useful to you. I also bought both buildings "as is" with all the city code violations, and you would literally have to spend hours and hours understanding what that means. However, as you can see I am closer to the 2% rule than the 1% rule even here in the Chicago market.

What criteria do you set for screening rental properties?

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