real estate analysis and "rules"

[Andrew Brewer]

Hi everyone, I wanted to pose a question about analyzing potential properties and how to make the numbers work. For my personal goals and purpose of this example I'm looking for long term buy and hold using conventional financing with 20% down at 5% interest assuming closing costs at 5% the house and looking for a minimum of 10% COC return. What I am trying to determine here is a "rule" of my own to use when evaluating potential leads and if this is feasible. I'm looking in the KCMO market and used the average property tax rate of 1.38% in jackson county as my number for taxes(not sure if this makes sense). I would appreciate any insight and positive or negative criticism.

I've heard about the 2% rule, the 1% rule, the 50% rule and how these rules should be used as a general test to determine whether to evaluate a property further. I've also heard that the 2% doesn't really apply at this point in the market cycle and that 1% are harder to find than ever now.

By my calculations, it seems that nothing under the 1.25% rule will cashflow. I realize that everyone uses different numbers but I prefer to be more conservative in mine and here is how I've broken it down. This is also assuming a property is rent ready at purchase. I've used round numbers to make things easier.

purchase price: 100,000

closing costs: 5,000

down payment: 20,000

mortgage: 80,000

rent: 1250   <----- must rent for this amount to make the numbers work

vacancy @ 10% = 125

property management @ 10% = 125

repairs @ 5% = 63

capex @ 8% = 100

taxes @ ~ 1.38% = 137

insurance @ 65/mo

P&I 430/mo

cash flow after all expenses = 205/mo = 10% COC

Does anyone have any opinions? Also is it feasible to be looking for these kind of purchase/rent ratios at this point in the market?