Rental purchase rule of thumb

[Arthur Banks]

Can someone please tell me the 'rule of thumb' when evaluating a property for rental? Or better yet, what is the '2% Rule and the '50% Rule'?
I'm looking at a potential deal tomorrow and I'd like to get my numbers right.

Thanks in advance.

[David Beard]

Todd Carel - go to Zillow and pull up the houses listed between $15 and $35K in Oklahoma County. (There are 65 of them.) These are the 2% houses. You can buy them at 90% of list (we'll say), put in $8k of rehab, and rent them out for 2% a month.

Now there's a good possibility that you won't want to own in these areas, and that is when you see the 2% rule for the ridiculous thing that it is, not sure where it came from. And these houses are TOUGH to finance, loan amts are too small and many bank redline the areas that they're located in, meaning they lower the LTV, raise the rates, or just refuse to make the loan. So no benefit of leverage.

So maybe you want to jump up to the $50-60k list-price homes, where you'll be all in for $60-70k and rent for $950/mth in a nicer area, amounting to around 1.5%/mth. Now you're getting more into the "sweet spot". These homes can be readily financed, tenants are better, less damage to your property, etc. You might see that you end up NETTING a higher yield than those 2% properties, with less hours spent. Certainly your cash on cash return is better due to the financing that is available.

And of course you can jump up to the $90-100k (after fixup) homes that might rent for $1,250. These will be in good school districts, much better tenant class, and likely the least anxiety and hours of your life managing tenants. Houses in this price range also allow you to better utilize the limited number of fixed-rate Fannie Mae loans you can obtain. (You can put more of your capital to work at these historically low rates.)

Your call.