Back of napkin calculations in east bay

[Ari Archer]

I'm curious what sort of back of napkin calculations people use in the East Bay to get a quick picture of cash flow. It would appear that nothing passes the 2% test. 50% rule seems to be working ok, but I'm curious if anyone uses it around here or if anyone has other quick tests they run. I know every place is different and you need to run full numbers on places you're really interested in. Just looking for a broad/simple first test.

Thanks!

[Wenhao Leu]

Sorry to have nothing to offer on this by way of an answer, but would be interested in other's thought on this as well since I am a newbie investor in that area. 

[Ralph R.]

Ari Archer As you gain experience this gets easier. I invest in Colorado. I have found that certain expenses will run the same average cost according to location. I.E. Insurance in someplace CO for a given 1500 square foot SFR will run about the same for ALL 1500 Sq ft single family rentals. Trash pick up, taxes property management will all run about the same for any similar property in the same neighborhood or similar area. You will find rents very compatible as well. If you run an analysis on a given property and call and get actual numbers then you can get an idea what the expenses and rents for most properties in the same category will run. For example I know that in one of the places I invest a 3bed 2 bath house in a high C area will cost 125 to 150k. It will bring in 950- 1000 a month rent. I can use these numbers along with 500 taxes 450 insurance 10% PM renter pays all utilities. That's the norm for all similar rentals in my area. When I find something on the upper end of that price range I ignore it. On the lower end it becomes viable. That's when I start really crunching numbers, looking at property condition, and really start doing due diligence. Similarly if it needs rehab I know I need to be all in at or below 125k. When you are looking at lots of properties separating the good from the bad is more of an art than science. Once you decide to investigate further it becomes a science and you must use only verified exact numbers. Hope this helps. RR.

[Michael Simpson]

I don't think you'll get to the 2% rule in the Bay Area. I have a friend who looks at it differently. When looking at places to buy, see if you can create more rooms or apartments. There are always People who want the cheapest available. If you see a commercial building with a 2 br apt above renting for $2k, see if you can create 3 studios and rent it for $1200 each.

[Arlen Chou]

@Ari Archer the generic "rules of thumb" on BP really don't apply in the Bay Area.  As @Michael Simpson has pointed out, you need to find the hidden value in the property.  Most of this hidden value will mean that you need a good amount of working capital to get your building to a BP "rule of thumb".  If you really want a VERY simple rule I would go with 1% after your stabilization period.  But remember cash flow will be dependent upon how much you put into the deal at purchase, how much you spend to improve, and your ability/mount you refinance money back out at a substantially later point in time.  

I highly doubt you will be able to find anything on Redfin or any other service, for Bay Area proper, straight out of the box.

-Arlen

[Chris Mason]

Gross Rent * 75% - PITI.

For California, this is a little more accurate than the 50% rule. The 50% rule implicitly assumes that property taxes go up with appreciation and rental income. That isn't true in California. Prop 13. In a few years the home can appreciate by 15%, and rent can increase 20%, but your taxes aren't going up by either amount. So you multiply by 75% instead of 50%, and put taxes on the back end of the equation (taxes aren't explicitly in the 50% rule, so we need to add them somewhere).