B&H: If you can't get 1% rent/PP, is it even worth the hassle?

Question

Should clarify: >1%.

It's a lot harder than I though to find an actual deal. I haven't found anything yet that I'm comfortable buying. This would be my first LTR buy & hold purchase.

For the area I want to buy in, I was looking at houses that had a 0.7% rent to purchase price ratio, which was about the best I could find. When accounting for all expenses (including PITI), 20% down, I was calculating anywhere from a 6-10% return. That is definitely not using the 50% rule. With the 50% rule, I'd be negative cash flow in a heartbeat.

In some ways, I have trouble believing the 50% rule because in our own house that my dad has owned for 35 years, he literally hasn't done anything but file a few insurance claims and replace a roof and HVAC system. He replaced a water heater too but found later that it was unnecessary. The HVAC system also wasn't really necessary to be honest. No, it hasn't been updated in 35 years either but unless the place is really thoughtfully designed then most places look pretty much the same in my opinion. I understand that this is with him owning the house, but are tenants really THAT much harder on the house? I would think the higher quality tenant would be about the same. And if they do damage, there is a security deposit for a reason, not to mention most honest people are going to own up to anything they damage.

Anyway, if we do use the 50% on even a 1% purchase price in this hypothetical situation: $1k/$100k yields a return of about ~7% (probably less) with 20% down. With as much work and headache as it takes to even acquire a property like that in today's market, 7% is pretty discouraging. I'd rather put my money in MLPs and REITs at that point. Do people fear the word "stock" so much that they're seriously willing to settle for a measly 7% return given all the work (at least initially) involved?

So, if the 50% rule is pretty likely over a long period of time, then there is no way I'd accept anything less than a 2% rent/PP. And in this market, good luck, even in the cash-flowing midwest. Find that ratio definitely takes some hard work in today's market.

Am I missing anything?

Account Closed · Answer

I feel like finding deals are the most difficult part of REI. We work with a broker who sifts through hundreds of properties and writes dozens of offers and we're lucky to get one accepted every now and then.  It's a numbers game.  Can't imagine buying and holding in most of California  right now.

Lee S. · Answer

No doubt that is the hardest part, I don't think anyone would disagree.  When I see people in other parts of the country buying off the MLS or buying houses for under 100k I do have some envy though even if they were local deals I have no interest in low quality properties. I think patience is key, if it's not a deal then it's not a deal, next.

Adrian Smude · Answer

@Devon Garbus I got a property just above the 1% rule off the MLS a year ago in Lakeland and that's after I bit a few thousand higher than asking.  But I agree now a days it's close to impossible.

@Ricky Stafford you have a lot of wise advice here.  Don't get too wrapped up into these rules of thumb.  Use the calculators and remember numbers don't lie!

Devon Garbus · Answer

a lot of potential clients get mad at me when I tell them nothing onthe mls will meet 1% rule if it's currently cash flowing unless it's section 8.

Like for some reason I am hiding good deals from them and don't want to make commissions.

B+/A neighborhood rentals in tampa the going rate on MLS is like .7-.8%. Unless you put some sweat equity in, which for some reason people are scared of.

Arlen Chou · Answer

@Ricky Staffordfor the person who is just entering REI, finding deals that fit the 50% or 1% targets, right from the start, is pretty hard to find.  EVERYBODY is looking for deals like this and not all sellers are going to be desperate enough to sell at the prices needed to get to these targets.  I am not sure where you are looking for your deals, but if you are going through the MLS, then your probability of finding a deal are pretty slim.  Most of the guys who reach these targets are doing much more aggressive marketing/search and getting off market deals.  With that being said, doing yellow letters or driving for dollars might not be your thing.  That is not a problem, but you have to adjust your expectations.  Look for deals that you can turn into 1% deals with "value add".  Basically find deals where the rents are low, but market rents are higher.  You do the renovations to get the rents up and you reach your target numbers.  You obviously need to work in your renovation and holding costs into your acquisition calculations.  I am in a high appreciation area, so this strategy works for me.  The renovation/turn over period puts some short term pressure on finances.  However, once I get rents up to market and refi the initial money out, the numbers have blown the doors off the 1% or 50% targets.

Good luck!

Arlen

Daria B. · Answer

@Ricky StaffordI personally don't ride on the 50% or 1% "rule of thumb". If I did it would eliminate the entire market that I see. It may work for certain types of properties and certain areas as well but I don't see it for all properties. In the beginning I looked at these "rules of thumb" and honestly for some deals it would not have been wise. I base my numbers on actual taxes, ins, condition of house (ie roof, w/h, hvac) and what the yields for rent to cover expenses and debt (if any). Maybe I'm missing your point.

Devon Garbus · Answer

Yes, and last year off the MLS there were tons of REOs and high equity flips as well...

Lee S. · Answer

I'm in the same boat here in my market, small town in California but getting anything close to 1% off the MLS is laughable and i'm talking about the worst houses listed. I just started a direct mail campaign and have a few other houses I'm planning to contact from my "cycling for dollars".

I've put in a couple offers with no luck, one would have been a great first rehab project but I was out bid by someone by almost double who is now doing a live in rehab.

I've put in a couple offers with no luck, one would have been a great first rehab project but I was out bid by someone by almost double who is now doing a live in rehab.  I think they underestimated the work but since they are planning to live in it and not looking for profit they will probably still come out even or slightly ahead of having bought retail fully rehabbed.

I bought my current house back in 2011 as a short sale, I plan to turn it into a high end rental eventually.  If I base it off what I paid at that time and what I could rent it for today I'm at about .7%.

The other scenario of investing at a distance is of no interest to me.  I like that I know my market and I will be patient to find the right deal.  I can't imagine the time wasted driving to properties 30-60 minutes away or worse yet states away, hello no life.

Jassem A. · Answer

@Ricky Stafford

Could even be way less than 10-15k.  I don't see a lot of work assuming the plumbing and electrical still work.  Some of the rooms just need little drywall and paint and some rooms need new floor covering along with the siding patched in.  I'm guessing I could restore it myself for a couple thousand and could hire it out for about 5-10k if I lived in that area.

B&H: If you can't get 1% rent/PP, is it even worth the hassle?

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