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

[William A.]

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]

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