Rent at least 1% of sales price? Bad Deal or not?

Question

I found a duplex in my neighborhood that is selling for about 150K, fully rented out for 1300/month. Taxes are about 123/month. The tenants pays all utilities. I would be responsible for mowing/snow removal. Any thoughts on rent income vs sales price? Should rent be at least a certain percentage of sales price? Any thoughts on this deal would be appreciated.

Erik Hitzelberger · Answer

William, There's no good way to say this other than to be blunt, but the 1% rule, 2% rule, and any other rent-to-sales price ratio are beyond meaningless. The only thing that matters is whether the property meets your goals in terms of 1) cash flow and 2) net worth. When you properly analyze the deal including PITI, management and variable costs such as vacancy and maintenance, you can determine whether it is a deal. Be sure to properly allocate your allowance. It is an all too common mistake to blindly allocate the same vacancy and maintenance rates to homes across wide rental rates and with varying degrees of deferred maintenance.With a 20% down, 4.5% fixed rate, 30year loan and 10% management fees, you'd make $350-380/ month BEFORE variable costs. If the property has no deferred maintenance, proper material selections, long-term leases, and is in a decent (easy-to-rent) area, it would likely be a decent deal. As you deviate from these factors, it gets tougher. You'd likely still have positive cash flow in most cases, but you'd want to be careful. Also, you need to consider whether appreciation matters to you and whether the house is in an appreciating area.Finally, PM me if you want to talk about turnkey rentals.Erik

Chuck B. · Answer

@William A. - I use the rent multiplier rule all the time to gauge potential buy and holds in Louisville. It's harder when you're a little unsure of the rents an area can bring but you can do your research on Zillow and Craigslist (Map View) to see what the going rate is. The following is better advice for Louisville and probably does not apply at all to high-value, high-appreciation tier 1 cities:I personally would never buy a rental property where the monthly rent was less than 1% of the price + repairs / hardening unless there was something else at play... like it was a really nice house/area and I wanted to live in half of the property for a while. (I lived in two duplexes and turned one of my residences into a duplex as I was building my portfolio and those were mostly 1% deals) If however you think the appreciation on that property will be far faster/higher than others expect then it might be worth a leaner deal at 1%, but appreciation plays are mostly speculation/gambling. If you're a doctor or high-income, hands off individual, than by all means, buy really nice 1% deals in nice-to-trophy areas and let appreciation and equity-build-up take care of you. That's what I'd do too! If however you're looking to move into rentals-as-retirement sooner than later, you need some cash flowing properties. Your financing terms can make a 1% deal cash flow nicely. That is, you can buy a 150K duplex that rents (in total) for $1,500 a month if it's financed on fixed terms over 30 years. If however all you can get is 10, 15 or 20 year financing (and NOT at fixed rates) then the math is very different. You can only get so many conventional, 30-yr fixed loans, so I'd encourage you to use them for your biggest deals. After a time and a certain amount of rental properties you'll only be able to get commercial loans and it becomes a lot more expensive each month for the mortgage. In Louisville, for strictly rentals, I'm looking for 1.2% to 1.6% deals. If you want to go to the west end (say 40th street and further west... the "best of the west" in Louisville) then you should be looking for 2% deals. For comparison/reference, my last four deals... price+repairs in Shelby Park of 63K, rents for $829 section 8 (I'll fix this up and move it to a market-rate rental of $1,100+ when current tenants leave). Price+repairs in Shelby Park of 80K, rents market rate for $1,050, Price+repairs in Shawnee of 42K, rents market rate for $850. Price+repairs of 40K in N.E. Portland neighborhood, rents market rate for $800. (Portland is for the brave or foolish)Best, - Chuck

Jay Leisten · Answer

Erik Hitzelberger does turnkey in louisville. There are also several good property managers in louisville. Find an agent/ broker that shares your values and goals. There are several turn key providers and most focus on one area or another, so it's important to lay out your business plan then find the individuals or teams that fit your goals.

Lesley Resnick · Answer

I am a big fan of the rent multiplier i.e. 1% per month etc. It is one of the few ways to compare different properties in different cities. How do you compare a quad to a SFH? Typically the larger (4+) number of units the lower the rent multiplier. The other important measure is the amount of cash (NOI) you have left at the end of the month. Historically, 1x was considered good in most cities. The major cities NY, LA, SF etc, it does not work. Second and third tier cities (Louisville) will potentially be higher. If you go to the best areas, on the water, etc, then you are going to be below 1%. If you go to the rough part of town you can find 2%. The goal is to be 1%+. If you can find above that in areas that are not blighted you are doing really well. Each city and neighborhood vary, you need to do some research to determine what the numbers should be in Louisville.

Jeff Filali · Answer

@William A. That deal at 0.86% would be very tight and one major repair could break you. There's much better deals out there. I wouldn't do any deal that's under 1% for sure.Here's a few examples of turnkey deals we have acquired this year showing you there's definitely better deals out there:4-Plex recently updated & occupied bringing in $2,800mo - Available for $115K (2.4%)4-Plex recently updated & occupied bringing in $2,580mo - Available for $240K (1.1%)3 Pack of occupied rentals bringing in $1,300mo - Available for $68K (1.9%)Duplex turnkey occupied bringing in $1200mo - SOLD last week for $75K (1.6%)SFR turnkey occupied rental bringing in $600mo - Available for $34K (1.7%)Keep searching and you can find much better deals like these for Buy & Hold.

William A. · Answer

Kenneth Mooney · Answer

William A. I wouldn't do the deal knowing that you can find cities across the US that have streamlined brokerages for you to invest with. Streamlined meaning they help you every step of the way from finding the right deal, to renovating it, to finding the tenant, and all the way to managing it. Not to mention those streamlined brokerages are going to be able to find you much better deals than the one you were speaking of.

Andrew S. · Answer

If you don't need to put anything at all into the property in terms of renovations/upgrades (rare, in my experience), you may be able to break even but it will be tight. Also depends on how much cash you put down.

Jeff Filali · Answer

@Brian M. shoot me an email

Brian Marshall · Answer

Where are those 4 plexes located? Are they still available?