New Member from Huntington Beach, CA

[Carlos O.]

Hello everyone,

After a couple of weeks of listening to the amazing podcasts they have here at BP, I've finally decided to join. I'm just starting out in my RE journey, mostly been absorbing as much knowledge as I can get my brain on. I'm currently looking at out of state rental property near Tulsa Oklahoma, running numbers here and there to try to get a good understanding of how the numbers work. Round Rock TX is next in the number crunching.

I would like to be able to generate $4-$5K in passive monthly income within the next 5 years so I can quit my job and start working on other projects; I've always wanted to have an IT business.

I am interested in BP meetups, so if anyone is planning one, let me know.

Thank you,

Carlos O.

[Account Closed]

Originally posted by @Ali Boone:

So price-to-rent ratio, as it refers to rental properties, refers to the ability to gain positive cash flow based on the price of the property versus how much rent it can bring in.

ONLY  if the property can collect that rent without extravagant expenses.  Then the price-to-rent ratio is just smoke and mirrors to convince someone to make a risky investment.

Think about it Ali, if a $1,000 rent sells for $50,000 in the 2% area then why would investors pay $125,000 for the same $1,000 rent in a .8% price-to-rent ratio area?  The 2% area is definitely more risky as determined by the market.  Unfortunately a lot of people that are sold this "cash flow is profit" hogwash are the very people that NEED the promised cash flow and when the vacancies and expenses are not as advertised then they are the least likely to be able to hold the property so then it ends up "churned" to another "cash flow" investor.   

As far as any price-to-rent ratio test to determine if it is better to buy vs. rent the bias generally goes to buying after a couple of years.  So yes, if you are only going to be in town a few years you probably are better to rent.

Following 2% areas will pretty much guarantee that you will invest in a poor performing investment over time. 

The more important metric an investor should be looking at is rents over time.  In your investment areas you may buy in at 2% and two years later it may be 2.5%  Yeah, how smart are you.  But that may only be because your $50,000 investment is now only worth $40,000. 

Now in a .8%  area it may drop to .6%.  :-(  Of course that is because the property has increased by $50,000 and the rents haven't caught up.  Ali, now do you see how selling an area based on price-to-rent ratios is foolish and misleading?

[Ali Boone]

@Account Closed

You misunderstood what I was saying. I never said buying in an area solely for price-to-rent ratio is the way to go... I said it's a starting point. I mentioned in one of those comments somewhere that there are a lot of factors that go into deciding to buy a rental property, but price-to-rent ratio is an appropriate starting place. Start there, then analyze other factors. I also hate the 2% rule, as I mentioned, and I don't advocate it. I tried to make it clear I was only using that as example. To support your point, if I see a property that fits the 2% rule today, I immediately red flag it in my head rather than jump on it, for similar reasons to what you mention.

You didn't ask me about all the factors I look at in determining whether I want to go forward on a cash flow rental property investment or not... you only asked me to explain price-to-rent ratio, so I did. No where in there did I say that's all I look at, and in fact I specified it's not all I look at. Just the starting point. So calm your horns.

[Carlos O.]

Thanks for the welcome @Jon Huber I'm definitely trying to get a plan going on here before jumping into RE. So far I'm making good progress, but there is soo much to learn, I'm learning something new every day. It's great to have people like @Ali Boone and @Chris Simmons share their knowledge that would be difficult to obtain on my own.

[Chris Simmons]

@Carlos O. 

In following up, I determined the duplexes were not a good deal so I dropped them and made an offer on the house i mentioned earlier in the post. Got it under contract for $68,000 and close Friday. All in with closing costs and rehab, I should be just under $80,000 invested with an ARV of $100,000 and $950-$1050/month in rent. Do a cash out refi in 6 months to recoup cash - pay back private money that funded the deal initially and I should have zero dollars of mine invested in this.