2 units ($2400 rental income) whats your price?

Question

Strictly looking at it from a cash flow basis and assuming it needs no major repairs. What would you pay for a 2 unit that collects $2,400 in rents. I am just looking for a 30,000 foot offering price. Not the lowest offer...which would be Free! lol.

Thanks!

Dave Kennedy · Answer

I suppose the areas that I would feel comfortable living with my tenants are likely not great cash flowing deals.

My parents started in a 3 family for 7 years, as the owners with 2 other families living there. It was not the nicest neighborhood but it was a great stepping stone for them to purchase the house they still own today, which at the time was a brand new developement 20 years ago. Neither of them made a great salary but it seemed like the multifamily really set them up for life. They held it for about 15 years, even after we moved out when I was 5.

Eventually they cashed out now they own their main residence (500k-550 house free and clear) and have a lakehouse in Maine with a small mortgage(they built the house). Neither of them are 60 yet. I'd say they planned well.

I'm hoping to get a similar start with a multfamily...but I'd eventually like the have a portfolio of them i can retire safely on.

Jon Holdman · Answer

There are several sticky threads in the Rental property forum about rental expenses and the 50% rule.  This rule simply says the expenses (in the IRS sense - i.e., operating expenses), vacancy, and capital items will, on average, be about 50% of the rent.

The 2% rule is a simpler version of the 50% rule.  If rent is about $500, then applying the 50% rule, and taking out $100 per unit, leaves you with $150 for your payment.  That gives you a max price/loan of $22,500.  That make the rent about 2% of the purchase price.  This rule works OK around $500 rents.  Higher rents have a lower percentage, lower rents have a much higher percentage.  For $300 in rent, expenses are $150, subtract $100 for cash flow and that only leaves $50 for P&I.  That makes the price $7500, and the percentage almost 7%.

$100 is just a common goal for true cash flow.  So, the calculation is rent / 2 to get your NOI.  Then subtract $100 for your cash flow.  What's left is the payment.  Compute the price from that.

Will Barnard · Answer

Deepending on the area of your investment, living along side your tenants may or MAY NOT be a great idea. Sure you get an OO loan and have tenants paying for your place to live (at least contributing to it) but in many cases, you want to have seperation from you and your tenants. If you invest in a middle to upper middle class neighborhoods with nice HOA facilities, etc. your tenants will be of higher quality and would be much more possible for this scenario to play out right.

Jon Holdman · Answer

I'd never want to live in a duplex with a tenant in the other half.  Read about the drug dealing tenant who so scared the owner she wouldn't even go to her home and was living in her car.

But, yes, I'd do the calculation just the same.  Then, I'd realize I would be way in the hole every money thanks to my one tenant who's a complete deadbeat (me!) and never pays any rent.

Dave Kennedy · Answer

If you were living in the house in one of the units does that change the formula or do you always look at it from a cash flow view. Would you just assume at some point you want to move out and you would have 2 tenants...it has to work on those numbers, correct?

Account Closed · Answer

Hey guys,

I'm getting more acquainted with Rev. Polish Notation on my calc.  after some long days of kicking and screaming. So I understand the calcs and was able to figure them out on the calc. What a rush! haha

My questions:

1) Where does the 2% rule come from?
(estimated rent/.02=present value)

2) Where does the 50% expenses originate from?

3) Less $100/unit from the 50% of estimated rent?

If links are going to be easier to post rather than explain; please do.

Dave Kennedy · Answer

Another question....how accurate is the 50% rule. I know you guys use it as a quick screener. But given the purchase price that it yields, if you were to buy at that price do you normally get more then $100/door in reality?

Dave Kennedy · Answer

Agreed Jon....at the price of 350k its not even worth looking at as an investment.

It's hard to believe but like you said, someone will buy their story and take the bait. As you said if you put 20% down its seems like the mortgage payments would be covered by rents of $2,400 and thats probably enough for someone to hop on it, not fully understanding all the other expenses that go into owning a multifamily.

The appreciation bet is not where I want to be in this economy, even if we have seen a 20-25% price reduction since the peak around here.

Michael Rossi · Answer

The 2% Rule does not include any required repairs.  That's what happens when you post in the middle of the night Will!!!  LOL!

Here is how I would evaluate this deal on the numbers.

Gross rents:  $2,400
Operating Expenses:  $1,200
NOI:  $1,200

Less $200 desired cash flow ($100 per unit per month = $1,000, which is the maximum payment

Putting that in my mortgage calculator at 30 years and 7% interest, the maximum purchase price would be $150,308.  So, I agree with Jon.

Mike

2 units ($2400 rental income) whats your price?

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