1% or 2% rule in Orlando?

Question

Hi everyone!

So I've heard about the 1% rule & 2% rule (or guidelines) when purchasing a rental property: the monthly rental rate should be 1%-2% of the total amount you have in the property to make it a good investment.

From those who have successfully invested in the Orlando area, what kind or percentages are you seeing (if you don't mind sharing)? And where in the Orlando market are you seeing these percentages?

I still haven't purchased my first property, so I'm trying to get a feel for what I should be looking for when looking in the Orlando area.

Thanks in advance!

Andrew Schaefer · Answer

I own three properties in Orlando, but I wouldn't jump in here as a buy-and-hold investor in 2018. Mine were bought over the last 6 years and averaged about 1.1-1.7% at the time of purchase (2%-2.5% in nominal and not real dollar terms now).

Today, you can only reach 1% in Orlando/Orange Co. if you're buying in a not-so-great neighborhood or are in the 45-60 min radius to Orlando proper such as Polk or Volusia. Anything higher and you should be flipping because the better deals than that are hard to find.

Have you ever owned rental property?

Do you put more weight on long-term price appreciation (with better tenants on average)? Or cash flow by going into iffier areas that go hand-in-hand with greater tenant drama and turnover?

Do you live in the area? Another idea is there's a brisk market here for short-term rentals so if you live here or have a VERY good ability to manage your business from a distance you can beat 1% easily and maybe even start climbing a little towards 2% if you don't factor in the cost of your time to manage it. But do your homework; the City of Orlando (most of what people think of as Orlando isn't inside city limits) is putting new restrictions on short-term rentals starting next month I believe.

Sam Shueh · Answer

Really matters little. But I can tell you 1% rule does not apply anymore in most of North America.

Chris Grenier · Answer

In Orlando & Central FL if you stick around the $75-150K price range you can achieve 1.00% - 1.25% sometimes. Anything more than that you’ll be in the 0.75-0.50% range.

To keep it simple just look on zillow/trulia and orlando realtor website for market info and average property price/value and what the median rent is. The best zip codes for the best percentages in Orlando will be 32805, 32811, 32810, 32808, 32818, maybe 32835 and 32809

Andrew Schaefer · Answer

Enjoy my annotated Orlando map pulled from the City's permitting dept. I might as well have printed it out and used a crayon but it does the job for non-locals.Green = OK to apply for STR with the City of OrlandoGrey = Within the city but not approved for STR.Everything else = Few if any limits. I think Orange County has a deal to collect taxes through AirBnB and maybe others like VRBO but it's more or less STR-friendly.

Samuel Ruelke · Answer

@Andrew Schaefer  Thanks again for the detailed response, awesome feedback. That would be great if I could find a similar property from a numbers perspective. But as you said, in today's Orlando market, the majority of properties are more probable just to break even (or slightly negative).  So, are you saying that your property would generate $400/month over your monthly PITI as a SFR & $800/month over your monthly PITI as a duplex/triplex?

Don't be in a rush to buy. Do the numbers IN WRITING like a business if you intend to treat it like one, even if it's house hacking and not a 100% rental. Then before looking at specific properties be sure to have a pre-approval letter with a local lender in hand.

Running the numbers in writing like a business is actually the exact perspective I've being going on. Each property i find that looks like it may be viable, i run a report on it to see what the numbers actually look like. Understandably though, i'm sure some of my numbers aren't entirely accurate due to a lack of my own experience, but they're to the best of my current abilities based on data gather from BP and trend averages that others have seen.

Be honest with yourself that you're betting on price appreciation and hedging against inflation because the neighborhoods with a large share of 30-somethings renting or owning in it that are fairly safe are going to be about break-even with rent prices at best. As long as you're OK with that offsetting of various risks depending on where the local market and local economy trend then I'd still consider buying. But don't do it if you're looking to simply earn a return on your money; you're house-hacking to make your cost to ante up to buy into the market less than the alternatives of either not playing or buying elsewhere with a higher ROI but still paying a variable rent for your own personal residence.

My goals are to play for cash flow and ROI. I only want to look at appreciation as the "icing" on the cake (unless we're talking forced appreciation). But I wouldn't think it to be a smart move on my part as a beginner to play around with swings in the market and bank on them. I'll keep my head up for potential properties that may pop up.

Thanks for being honest and sharing!

Cristian Aviles-Morales · Answer

Very informative. It's actually quite humbling. I've been running numbers here in our city and what you're saying rings true even though I don't want to believe it. Everywhere you want to live, everything is break-even or slightly negative. Only way it will work is if you put in enough cash to cash flow it. Or take the hit for a few years and then refinance for a lower monthly payment. By the way, about the short term rental changes coming to Orlando.. what qualifies a short term rental? I have a primary residence that I may be leaving. Was planning on renting out all 3 bedrooms to tenants at 700/800/month in my area which is a definite Class B/30 something year olds type area.Will that no longer be viable?

Andrew Schaefer · Answer

You sound like me a few years ago. I live about 2 miles east of Orange & Central (for non-locals, that's considered our CBD's bullseye) in a 3/2 that I had rented with roommates for 5 years but then purchased from the owner nearly 3 years ago. It's gone up in value about 50% since then, more due to the market than to my repairs/improvements. My PITI 30 year mortgage is about $400/mo. less than what it'd rent for today as a 3/2, and about $800 more than what it'd rent for as a 1/1 and 2/1 as separate units which is do-able with its layout. But if I bought today @ FMV it'd be closer to break-even with the monthly escrowed payment before factoring in repairs, improvements, vacancies, etc.

That's the only way I'd do it... and have done it that way with roommates in the past. Get a SFR and roommates, or a SFR with a separate rentable portion (aka a "mother-in-law suite" or accessory dwelling unit) and you'll be subsidizing your own housing cost.

Sounds like me again for my primary residence. I bought it because I saw the area trending the right way (without giving away my exact neighborhood think Audubon Park or College Park) and I could afford it with or without roommates. Be certain that you can do the same since you're far outside the original discussion of 1% rule at this point.

Don't be in a rush to buy. Do the numbers IN WRITING like a business if you intend to treat it like one, even if it's house hacking and not a 100% rental. Then before looking at specific properties be sure to have a pre-approval letter with a local lender in hand. Feel free to ask me for referrals to lenders and a RE broker who will oversee your transaction/buyer's agent if you'd like good ones I've worked with in the past. I have a RE sales assoc. license and would get a referral fee on the latter since I don't use my license for anything other than that and my own transactions.

Be honest with yourself that you're betting on price appreciation and hedging against inflation because the neighborhoods with a large share of 30-somethings renting or owning in it that are fairly safe are going to be about break-even with rent prices at best. As long as you're OK with that offsetting of various risks depending on where the local market and local economy trend then I'd still consider buying. But don't do it if you're looking to simply earn a return on your money; you're house-hacking to make your cost to ante up to buy into the market less than the alternatives of either not playing or buying elsewhere with a higher ROI but still paying a variable rent for your own personal residence.

Andrew Schaefer · Answer

On 10/1/2018 (a week from today) the City of Orlando will end its amnesty period and begin enforcing new home sharing rules. Major new requirements for short term rentals within city limits as I read it:

• Pay the city an annual fee ($275 in the first year, $100 o/o, or $125 non o/o in renewal years).
• Have the resident present during short term rentals.
• Not rent more than 50% of bedrooms. Therefore a two or three bedroom property cannot rent more than one bedroom at a time.
• The rental portion of the residence must be designated as an accessory use space.
• Must include the registration number in all advertisements.

Cristian Aviles-Morales · Answer

Yeah. Makes deals harder to find and really shows what really is a deal and isn't. I'd advise you to keep an eye out on Condos. I think that's a good middle ground to get a decent cash flowing property. Just keep your eyes on the HOA fees. I've found some but the HOA fees (which is your responsibility) kills the deal and makes it not worth it. There are some areas where it's 600+ a month. Ridiculous.

Marcus Alig · Answer

Having the same issue in Orlando area.

Above $175-200k, and it's hard to cash flow, since the rent needs to be $1,750 - $2,000k per month.

Below $100-125k, and it's likely not a good neighborhood.

1% or 2% rule in Orlando?

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