Rent/Cost Averages vs Cash Flow

[Bryan Beal]

We started a real estate investing company last year and we were able to purchase and lease out 12 SFR units. I've run calculations to date on all of the properties we own and all of them look strong... With the exception of the rent/cost analysis. Our average came out to be 0.83%. These homes are in great shape, in good neighborhoods with great upside potential. We're cash flowing well on all properties but from everything I've read, the "rule of thumb" is to be above 1.5% in rent/cost. Again, with positive cash flows in emerging markets, that 1.5% seems high based on my experience. My question is - am I missing something? Is that number more suited for "high risk" investments vs buying in established neighborhoods? Any insight would be greatly appreciated!

[John Warren]

@Bryan Beal the price to rent ratio is just a tool. Every market has different factors that the price to rent ratio doesn't account for like real estate taxes, labor costs, tenant quality, etc.  Here in the Chicago suburbs where I am investing, I know I can't make any money below a 1.2%, and my preference is 1.4-1.5% or better. This number is different in the city believe it or not. 

The other thing that comes to mind as you describe your numbers is that you should make sure you are holding back adequate reserves. It sounds like you might be, but I see a lot of folks run numbers on their "profit" that doesn't include reserves for future issues like roofs, hvac, electrical replacement, unit turns, etc.