Quick Method to dismiss or look into rental property

[Tony Wallis]

I am looking for input on methods being used to quickly qualify or disqualify properties. Spending a lot of time running numbers and wanted input from the community on what key metrics are being used to evaluate a property quickly so it either gets a deeper dive or it is scratched from the list.  

[Erik W.]

Some use the 1% Rule.  Goes like this:

Property must have monthly rent of at least 1% of the "all in" cost (purchase price + closing costs + rehab + holding costs).  Example: If it rents for $500, spend no more than $50,000.

I use the 2% Rule.  $30,000 "all in" rents for $600.

Most houses that do not meet at least the 1% Rule will not cash flow positive unless you pay cash or have a sizable down payment.  It's a quick-n-dirty method, and there are others.

[Tony Wallis]

Thanks Erik, Appreciate the input

[Greg Dickerson]

Originally posted by @Tony Wallis:

I am looking for input on methods being used to quickly qualify or disqualify properties. Spending a lot of time running numbers and wanted input from the community on what key metrics are being used to evaluate a property quickly so it either gets a deeper dive or it is scratched from the list.  

 It really depends on the size and type of property as well as the area. There are a number of factors that go into deciding on whether to take a deeper look or take a pass. You do not want to use any rules of thumb as they are very relative depending on occupancy,  condition of the property, location etc. You might have a property that has a fantastic cash flow but is in a area that you do not want to own property or needs a ton of work. On the flipside you could have a property that has terrible cash flow but has tremendous upside because it’s poorly managed, it could have excess land to develop, or any number of factors that somebody who knows what to do could knock it out of the park

There really are no shortcuts. Take a look at the overall property, area condition, occupancy level, expenses etc. and do a quick calculation of the numbers to see if it meets your return requirements.

[Tony Wallis]

Appreciate the reply. Sound advice. 

[Amit Bajpai]

@Michael Ealy

Can you send me deal analYzer link to my inbox

[Satyam Mistry]

@Tony Wallis Hello Tony, a few things I use in my market are below for a quick 5 minute analysis, I apologize if some are repeated:

1. First thing I look at is price. I primarily look for properties in the 100k to 175k range and usually am looking for something that has some value add potential or if at market value that it is turnkey, meeting my other criteria, and that I am not paying over market value. I look at recent sales of similar homes in the same neighborhood if the price point and pictures (if available) are of interest. I know for zip codes that are of peak interest to me by having looked at so many properties on the MLS everyday so just looking at the zip code helps as well.

2. Mentioned earlier as well, but I use the 1% rule as a general metric meaning the rent should be very close or over 1% of the purchase price + rehab (if not turnkey).

3. Good neighborhood to give me stability and confidence that the property will appreciate over time. 

4. Usually look for properties that are not too large say 1000 square feet to 2000 square feet as these are the primary sizes that are being rented.

5. Go on the county assessor site and check out recent sales of the property as well as property taxes. If it was sold few months earlier it was most likely bought by a house flipper and just something you should keep note of as it would have usually gone through a decent sized rehab recently. 

Best wishes on your search!

[Lee Ripma]

@Tony Wallis

You’ll never have incredible numbers all around - you’ve got to pick something you care about and focus on that. For me-I want to build equity so I’m looking for upside on the rents with rehab. Markets are different in the way that rental upside adds value. You’ll spend a lot of time analyzing properties now but you’ll soon be able to look at them and do the quick and dirty in 5 seconds. Anything that seems to pass your test you’ll dig in more. Pick a metric you care about and start focusing on it!

[Matt Nusbaum]

@Tony Wallis Michael Blank has a good quick and dirty 10 minute offer process. Check out this link: https://themichaelblank.com/videos/how-to-make-an-offer-on-a-multifamily-deal-in-10-minutes/

[James Wise]

Originally posted by @Tony Wallis:

I am looking for input on methods being used to quickly qualify or disqualify properties. Spending a lot of time running numbers and wanted input from the community on what key metrics are being used to evaluate a property quickly so it either gets a deeper dive or it is scratched from the list.  

 Some good napkin math is the 50% rule. Many rental properties will cost an average of approx 50% of their annual scheduled rents to operate.

[Mark Russell]

I’m still VERY new, but Lance Edward’s recommendation is a 10% cap rate, and less than $25k per door (cost + rehab). Understand, this is for 5+ units. 

[Michael Ealy]

Originally posted by @Amit Bajpai:

@Michael Ealy

Can you send me deal analYzer link to my inbox

 Yes Amit - I will send the link to the anayzer to your inbox

[Dwayne Phillips]

Michael can send me the analyzer to my inbox as well...Thanks

Newbie investor, looking at a townhouse (A rated) for rental in a excellent neighborhood with A-Rated schools...168K, 2BR, 3BA, however don’t think the rents will follow the 1% guideline more like 0.75....So thinking more about appreciation in 7-10 yrs....Thoughts from the BP community?

[Erica Osborn]

Originally posted by @Dwayne Phillips:

Michael can send me the analyzer to my inbox as well...Thanks

Newbie investor, looking at a townhouse (A rated) for rental in a excellent neighborhood with A-Rated schools...168K, 2BR, 3BA, however don’t think the rents will follow the 1% guideline more like 0.75....So thinking more about appreciation in 7-10 yrs....Thoughts from the BP community?

Dwayne! A few things to be careful about w/ your townhome.

Is there an HOA/POA w/ a monthly fee? The association could change the fee and any cashflow may be immediately eaten up or you would be paying in every month.

2 bed/3 bath? Interesting mix, 2 bed won't be as easy to rent as a 3 bedroom so your tenant pool narrows and rent is at the 2 bedroom rate. The goal is to have the largest tenant pool possible.

Make sure you are in a market that supports an appreciation purchase rather than cashflow. If you are a cash heavy investor, then it might be alright, but you are gambling on appreciation and that is something that you can not know for sure. As a newbie investor, my advice is don't invest for appreciation invest for cashflow and reap your rewards now, if you invest for appreciation you may never reap those rewards and that is no fun. Good luck out there!!!

[Dwayne Phillips]

Thanks Erica, appreciate the input. The townhome has actually 2.5 bath...I was looking at average rents for 2BR, just don’t see the TH hitting the 1% (slightly less) the only option I see is to adjust the offer to ensure I’m getting a positive cash flow...Your correct on appreciation, it’s not guaranteed 

[Dwayne Phillips]

FYI, yes there is an HOA, and CDD, I have these baked into the monthly expense

[Sri Popuri]

@Michael Ealy

Can you please send me deal analyzer! Thanks

[Kenneth Garrett]

@Tony Wallis

Become an expert in your market.  Select a couple areas and become a market expert in those areas.  This way you know the area so well you can make a quick assessment in minutes.  You will get to the point that a 45 second look and you can decide whether it’s worth your time.

[Keith C.]

@Mark Russell where can you find today units less than 25k a door without wearing a bullet proof vest ?

[Mark Russell]

Nowhere near NYC, or a coastline for that matter. I live in CT, and I can’t look near home. 

[David Chi]

@Michael Ealy

Hi Michael I am interested in the deal analyzer as well. Could you send it to me as well? Thanks

[Dan Wuertele]

@Michael Ealy

Can you send it to me too please?

[Jeffery Wilen]

People, You can download the spreadsheet from @Michael Ealy on his website www.nassauinvest.com .  Do some of the legwork rather yourself rather than just asking to be handed everything.

Not trying to be a jerk, I know Michael offered to email it, but if you want to be successful in this business you need to put in the work.  It shows right on his post that its a free download.

Just giving out some tough love advice...

[Mark Selcon]

@Michael Ealy id love a copy. Thank you.

[Mikhail Abbott]

@Michael Ealy

Hey Michael can you also send me your deal analyzer to my inbox?

Thanks

[Rob Massopust]

First what type of properties? SFR, Condos, or multi family.

What are your objectives, long term short term etc.

All have their own set of metrics and parameters to use.

The biggest mistake is to use an "analyzer" to be the end all in your calculations. There are so many other factors that come into play besides price and rents etc. The devil is in the details and this is where some investors either get in trouble or miss a deal. Like Wayne Gretzky says look to where the puck is going not where its been. Looking at everything as everyone will not be as good as seeing the potential. 

What part of NH are you in, I grew up in Londonderry - Fixing up homes for my old neighbor when I was 15 yo. 

Things to consider:

SFR - Cost per sq ft, comps, location, layout, lot size, zoning, neighbors, schools etc. Hardest to cash flow but often times you can buy fix, rent or live in. Taxes and financing are a huge component. Are you going to live there 2 years, and you fix it up then you get up to $500k tax free [if you make that much] if you sell it, that beats a monthly cash flow any day.

Typically you can use a GRM [gross rent multiplier] for most properties where you take the yearly gross rent divided by purchase price. This gives you a ballpark comparision. SFR's dont usually go by this method but it can work. Historically a GRM for SFR is 17-20.

Condos - Similar to SFR's but lots of times investors dont like condos due to the HOA. I love them. Best rentals I have ever had. Super easy to find, fix and rent and do ok with appreciation at a lower price point. The HOA covers alot of real costs like maintenance, landscaping, parking, trash, insurance, roof etc. So dont discount. We rent them out for corporate housing too. Works good.

Multifamily 2-4, also similar to SFR but really the GRM helps here. But same thing, can you fix, improve and get the rents up.

Also look at ROI, CAP rate etc.

Like I said taxes, financing and such make a huge deal in the deal. Unless you have all cash [which has a cost too] the terms and availability of funding goes along way. ALso if you are an owner occupied borrower you have lots of loan programs available like the FHA 203k Rehab loan. you can put down as little as 3.5% and get money to fix up and low rates all one loan. So if you put down lets say 5% and 10x your equity, that beats cash flow everyday.