Rental Property 50% rule, 1% rule, cash flow estimates

[Doug Hinkle]

last year I bought a 3b2.5ba 1/2 duplex for 100k. I had it rented for $960 within a couple weeks of closing, and did nothing but clean the place. When it rents again I could get $1000, I'm close to the 1% rule. $1100 might be possible, but I would have to spend some money on updates. The other "rule" I appear to have broken is the 50% rule. At the end of the month, I'm cash flow positive $140. When the 50% rule is applied (i used 40% because I'm doing the PM) I'm breaking even. I was already setting aside the $140 to build a cushion for repairs or updates. When I re-calculated the numbers at 100% financing I'm cash flow negative about $140. I understand that it appears that I forced cash flow into the deal with the down payment. Still, I'm estimating a first year 8% cash-on-cash return, much better than idle cash. After all that, I'm wondering if i overpaid/under rented this place. I'm looking to add another property or 2, and i want to make sure i use good estimating tools. should I be using 40/60 estimates at 100% financing to determine a good deal?

[Jon Miller]

I've heard people use the 50% rule, I've also heard people say 30-35%. What's your exit strategy and your market like? If you're trying to live off the cash-flow, I don't think there's enough. If you're buying rentals to sell later and keep the equity, you could be fine. Also, if housing prices are low where you are I'd wait for them to raise before refinancing/selling. I would not refinance to lose money every month; better to sell than to own a hole in your portfolio, whatever size it is. If you upgrade the unit and make more money, I'd add the estimated cost of the upgrades in to the purchase price and see if the 1% rule still works.