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Updated about 14 years ago on . Most recent reply

Evaluate Deal with 50% rule vs 2% rule
I'm looking at the 2 duplexes below:
Prop A
Price: $72.5 (accepted offer)
Monthly Rental Income: $1500
25% down 6% interest 30 year fixed: $326/month
Prop B
Price: $44.9 (listed price)
Monthly Rental Income: $1100
25% down 6% interest 30 year fixed: $202/month
50% Rule Prop A
1500/2 = 750
750 - 326 = 424
424/2(duplex) = 212 per unit (at least $100 per unit to be good deal)
50 Rule Prop B
1100/2 = 550
550 - 202 = 348
348/2(duplex) = 174 per unit (at least $100 per unit to be good deal)
2% rule Prop A
72500 * .02 = 1450 rent per month to cash flow properly
2% rule Prop B
44900 * .02 = 898 rent per month to cash flow properly
I know i have to look into other factors but for this we can assume both units are comparable both in condition and area. I have priced rent conservatively based on rent for the areas.
Using these screening rules both properties look like good deals. Property B looks a little better than property A. What do you guys think? Am I calculating the 50% and 2% rules correctly?
Thanks for your advice!
Most Popular Reply

John -- your analysis looks solid. Other considerations that come to mind:
Net Property Return:
Prop A = 9000/72500 = 12.4%
Prop B = 6600/44900 = 14.7%
Return on investment (ROI) in Year 1 with a 3/1 ratio of bank funds at 6% rate:
Prop A = 12.4+(12.4-6.0)*3 = 31.6%
Prop B = 14.7+(14.7-6.0)*3 = 40.8%
Leveraged ROI above 30% is excellent and generally where you want to be.
Though Prop B has a better apparent ROI, factors favoring Prop A are:
* should attractive higher-caliber tenant, thus reducing turnover, maint, vacancy time, and landlord time, all things being equal -- this will lower the expense ratio versus Prop B
* gets more of your capital working for you right now
* better economies of scale on loan closing costs
* Easier resale, as more lenders would finance at this size (you apparently have a "conventional" lender that will do the smaller loan on Prop B at the same terms, is that so?)
Sharpen your pencil on expenses, especially any differencese around who is paying utilities and takes care of the yard, or if age of buildings is considerably different.
Adjust purchase price in analysis for deferred maint. or large repairs/replacements that need to be done in the first year or two.
Good luck. Can you purchase both?