Basic Deal Analysis Question

[Carlos Arjona]

Hello BP Team!

I’m trying to get a better sense regarding the way I’m analyzing deals and how much I should be offering for different properties. I’m a new investor so I’m using very basic rules of thumb like the 2% rule for rents and the 50% rule for expenses when doing my initial analysis and I’d like to know if I’m being overly conservative and pricing myself out of deals.

So if I see a duplex for sale and the asking price is $150k, using the 2% rule tells me I would need to receive $3k ($1.5k per unit) per month to properly cash flow the property.

Now, let's say actual rents per unit are $850 per month bringing that to a total of $1.7k per month. Using the 50% rule for expenses projects an NOI of $850 per month and $10.2k per year; if my desired cap rate is 10% then the maximum offering price should be no more than $102k.

Am I doing this correctly?

Using the above example as a point of reference tells me that at $150k and with total rents gross income of $1.7k per month the duplex is overpriced.

Like I said, I’m a new investor and I know this is very basic, but bear with me. Your help and advice is greatly appreciated.

Thanks!

[Jeff Copeland]

In many markets, the "2% Rule" is no longer attainable. Think about it: Where can you buy a $100k property that will rent for $2,000/mo?

Like @Steve Smith said above, these are just screening tools. Kind of like your doctor taking your blood pressure and temperature before an appointment. They tell your doctor nothing about what might be right or wrong with you - but they do hell him/her if they ought to look more closely.

The example you gave above ($1700/mo on a $150k property) represents $20,400 of annual gross income on a $150k investment.

To tell whether the property is a good investment, you need to dig deeper in to the actual (or estimated) expenses, which might look like the following (these numbers are made up, plug in your own):

A property currently operating at an 8-cap, with potential to increase rents and/or decrease expenses, would be a strong buy in my market, barring any material defects or looming capex.

Hope that helps!