Finding deals based on sales comps, but rental comps too low!

[Amber Lister]

All of my experience has been in business investing, so real estate is still a new area for me. Buy & Hold and building a portfolio of rental properties is my goal. Here is where I'm struggling and I'm not sure if I'm doing something wrong in my search... I am finding good off-market deals that I am able to invest a total of 75%-85% of ARV. The problem is, I cannot find any areas in which the rental comps are also 1% of that ARV. So, cash out refinance won't go well and cash flow won't be possible. I'm in Houston, Tx where the market is pretty good so I can't figure out what I'm doing wrong. At this rate, I will only be able to fix and flip and I won't be able to hold and lease out any of my investments. I don't want to sit around and buy nothing at all so I'm fine with flipping for now but I REALLY want to start building our portfolio and I feel like maybe I'm misunderstanding something with this strategy.

Truly appreciate any thoughts or insight!

[Craig Clinton]

Hello Amber

The 1% rule is pretty general rule and I wouldn't base an investment decision off of that. I have 6 cash flowing rentals and none of them meet the 1% rule. I think a better formula to base your decision on is cash on cash return. For example, let's say you buy a $100,000 house that you put $20,000 out of pocket into it and your cash flowing $200 per month. That's $2,400 per year divided by your $20,000 cash out, equals a 12% return. Are you ok with that return % on your money? That's what you need to ask yourself. Ideally, with the BRRRR method, you have no out of pocket money in the deal after refi and you earn infinite returns.

You also need to calculate what the DSCR (debt service coverage ratio) if you're going to refi a property. This is calculated by taking your monthly rent and dividing it by your monthly expenses (mortgage, taxes, insurance, utilities, other). Most banks are looking for a DSCR of at least 1.2.

I'm sure BP has a rental calculator or cash flow calculator on the website.  You should take a look for one.  

Good luck and feel free to run a deal by me if you'd like.  Just leave off the address.