Quick Rules for Evaluating Small Multifamily Rental Properties

[Nicholas Sheridan, Jr.]

Hello BP community,

It has been a while since I have been able to get back on my RE learning track (due to just graduating) but I am finally back! I am new to RE and interested in the strategy of buying and holding a small multifamily property. As I go through the Ultimate Beginner's Guide I have a question that I can't find the answer to that is related to the 2%, 50% and 70% quick rules of thumb. After checking out a couple forums it seems as though the 70% rule would be used mostly for house flipping. What are some quick rules that you would suggest help evaluate small multifamily properties?   

Thank you

[John Leavelle]

Howdy @Nicholas Sheridan, Jr.

The 1% and 2% rules are related.  When buying a rental property we strive for monthly rental income that is at least 1% of the purchase price.  Hopefully, it will be 2%.  If the rental income is less than 1% a lot of investors will pass on the property.  You will find there are pro's and con's to every rule of thumb.  Just as there are exceptions to each.  And there are different opinions regarding using rules of thumb.  As @Sam Levine mentioned your Market plays a roll in whether the rules can be used or not.

The 50% rule pertains to Cash Flow analysis. You basically take the monthly rental income and multiply it time .50 (50%) to estimate expenses for the property in order to establish the Net Operating Income (NOI). You can then subtract your projected mortgage payment to get an estimated Cash Flow. It is a quick and easy way to analyze properties. If they meet the 1% and 50% rules then the property warrants more detailed analysis.

The 70% rule is typically used in Flips and distressed Buy and Hold properties that will be Refinanced. The way it is used you must first determine an After Repair Value (ARV) for the property. Your purchase price, Rehab, Closing and Holding costs need to add up to 70% or less of the ARV. That is so you will be able to turn a profit on the Flip or be able to get your cash out on the Buy and Hold Refi, commonly referred to as the BRRRR strategy here on BP.

Hope this helps.