50% rule in evaluating rental property

[Bade Raju]

Hello All,

           I am evaluating a property at 140K for a rental. The rent is 1200 per month.I inputted all the values in rental calc and found negative amount in 50% rule. What is expected amount in 50% rule? What is the general value that is expected in 50% value? If i get $100 in 50% rule should i go for it.

I am confused with brandon turner's webinar, as per that webinar he says  cash on cash at least 12% or 200$ cash flow. If i want to achieve this i have to ask the above property at 120K or so, which is highly unlikely.

Should i use 50% rule with some expected amounts or should i aim for 12% cash on cash. Please advise.

Any help is greatly appreciated. 

thanks

Raju

[Nathan Gesner]

CLICK HERE for an explanation of the 50% rule from @Brandon Turner.

@Bade Raju you have to remember it is a "rule of thumb" or general principle. It may not be true for your particular property. The calculators on BP are designed so you can evaluate the property with a variety of methods to see what works for you and your situation.

The 50% rule is probably used more as a filter. What I mean is that you use it to filter a large number of properties to see which ones may or may not work for you. If you have 20 properties to evaluate, you can get rid of a lot of the weaker ones by applying the 50% rule, the 1% rule, or whatever method you've developed for your personal standards and your local market.

I use the 1% rule which states a unit should rent for 1% of the purchase price. If I buy a home for $100,000 then it should rent for $1,000 a month. I use this because in my market it is hard to find a property that meets this 1% rule. If I see a home listed for $100,000 but I think it will only rent for $800, that is only .8% and doesn't meet my standard so I won't dig any further. I may be wrong, but at least I'm not wasting time evaluating dozens of properties that are highly unlikely to meet my standard.

If I find a property that appears to meet the 1% rule, that doesn't mean it is automatically a good opportunity. I still have to evaluate it deeper and consider all the factors like location, age, condition, etc.

This also helps me when driving around looking at properties that are not on market. I drove through a neighborhood yesterday that I really want to invest in. I found five homes that would make great rentals. However, they will only make great rentals if I get them at the right price! Each house would rent for around $1400 a month so I know that I need to buy them around $140,000 which is about 30% below market value. I'll dig deeper and determine how much I want to offer for them. If the owner is willing to consider my offer, I'll still have to look at the home in detail and determine if my purchase price still works once I know more details like the condition of the home.

That was a long answer but I hope it helps.