The "3% rule" deal
I strive to get the best deals I can. These are the following characteristics that I look for:
1) Great cash flow.
2) Great rental to purchase/rehab value (at least 2%).
3) Good area to invest in
Some people think the 2% rule is mythical, so I'm setting my sights on getting my next property to get 3%. Even though I've done it in the past, I really don't mind doing it again.
Comments (17)
Dawn Anastasi Dawn, on your option 2, I'd expect the 50% expense factor to incorporate the cost of PM and leasing (which I presume are providing). Typically the "50% rule" includes PM/leasing. The passive partner wouldn't be responsible for the whole PM/leasing fee, just their pro-rated share of it. Maybe I'm misinterpreting, but I would think that the passive partner would earn $4,500. It's worth noting that if you sold the property to an investor as a turnkey investment, you could not manage it unless you were a licensed agent working under a broker who would authorized the property management activity. At least that's true in most states.
David Beard, about 11 years ago
There are definitely advantages to being a lender in a real estate deal versus actually the owner but only for the LONG TERM. In a short scenario, such as 2 years, it makes more financial sense to be a lender versus an owner. Here are two scenarios I ran: Option 1 - Lend $17,500 at 8% on a 10 year amortization with 2 year balloon. The total interest received is $2,615.09 in addition to getting the full $17,500 back. Option 2 - Best case scenario - partner as an owner on a property and put $17,500 in; after 2 years receives the full $17,500 back from other owner to "buy them out". Receive 50% of revenue (assume $9000 over 2 years) and subtract 50% of expenses + compensation to other partner for annual property management + compensation to other partner 1 month rent for tenant placement (assume $7150 over 2 years). Assuming absolutely nothing goes wrong, the net gain is $1,850. Obviously for a 2 year investment, $2,615.09 > $1850.00.
Dawn Anastasi, about 11 years ago
Yeah, that option #2 would be tough for someone to be interested in I would think. If you are going to be a partner in a venture and take a risk, you are generally going to want more upside other than the monthly cash flow for a two year investment. If I want cash flow I'd want it to be more if a long term deal. In general, I think the prospect of owning real estate with no control is difficult as that is one of the key benefits of RE over stocks and other investments.
Matt Mason, about 11 years ago
I really like Matt's suggestion to move into the turnkey market to generate some additional capital, although it sounds like you may want to stay out of the fix and flip business.
Matt Morgan, about 11 years ago
David Beard there are always potential issues; putting things in writing and coming to a clear understanding of the goals, objectives, and exit strategies of each party is one way to overcome that.
Dawn Anastasi, about 11 years ago
Dawn Anastasi, I think I'd agree with David Beard, because on a long term buy and hold, there are so many things that can change over time with the property and the partners even if your goals are similar at the beginning. Life events may change for one of the partners and one may want out, but I imagine the majority partner would have to make that decision. In that case, the minority partner may just be along for the ride, which will cause problems. Similar issues could come about if future rehab is needed or major systems replacements. There are some ways to mitigate this some with a good partnership agreement, but even then it can get complicated. I work in Commercial Real Estate and see some of these issues in Value-Add partnerships that are designed to last only 5-8 years among institutional players, and I think it would only get much more complicated among buy and hold SFR's amongst individuals. Dawn, I have read your posts and listened to your podcast. It seems you have developed a good system in your market, but might need more capital to do all the deals you want. You may want to look into other ways of generating business like almost being a turnkey provider yourself. Looks like you have done some partnerships so may not agree. I'd be interested to hear how you structured your partnerships.
Matt Mason, about 11 years ago
Zechariah, to your question (and Dawn can pipe in, it's her blog post!), I've struggled with how a partnership in a buy & hold single family home portfolio, particularly where one partner is passive and remote, and another is managing it locally, can be put together in a way that makes sense for all parties. This is particularly true if there is no defined target date for exiting the property and presumably reaping a nice gain (ie. it has no defined ending point). The passive partner will have been better off just making a loan. Being tied together in an actual partnership over a multi-year period of time is fraught with potential issues, from my perspective, and I personally would avoid it. Partnerships do work well for flipping and short-term projects, and sometimes for longer-term holds of large apartment/commercial projects, where member resources need to be combined in order to acquire a large property. Or it can also makes sense in cases where a passive credit partner is needed to secure financing.
David Beard, about 11 years ago
Dawn Anastasi let's talk and go from there. I'll send you a PM.
Emma S., about 11 years ago
I see, how do you prefer to structure a buy and hold partner ship.
Zechariah Evans, about 11 years ago
Zechariah Evans buy-and-hold is for the long-term. There is cash flow every month versus just one lump sum. Fixing for flipping is a different ball game than fixing for a buy and hold (much more to it).
Dawn Anastasi, about 11 years ago
@Dawn Anastasi I don't mean to butt in, but i saw in a different thread you mentioned you prefer to on buy and holds as apposed to flips. As a newbie i would really appreciate hearing your perspective of why.
Zechariah Evans, about 11 years ago
@Emma S. Would you like to partner on it?
Dawn Anastasi, about 11 years ago
Hey Dawn, If you are not going to go for this deal, you can pass it on to me & help a fellow BP'er :) Consider it your first wholesaling gig :)
Emma S., about 11 years ago
I drove past the 2.14% property again. This one is really bugging me because I really like the house. But we shouldn't get emotional about houses, right?
Dawn Anastasi, about 11 years ago
Well, a deal kind of dropped into my lap however I'm not done with the current project I'm working on. It's a smaller 2-bedroom 1 bathroom single-family house, but the bathroom has been renovated some really nice features. It also has a large 2.5 car garage. It's a great house and I would have no problem renting it for $750/month. (My last 2 bedroom was rented out at $750/month and I literally ran out of applications there were so many people there.) However, with the purchase price, closing costs (assuming a cash purchase) and rehab work, it comes out to only 2.14%. *sigh* I hate passing up opportunities like this!!!
Dawn Anastasi, about 11 years ago
This is what I like to see! Stepping up to the challenge!
Junior Salters, about 11 years ago
Go for it, u can do it.
Anthony Aguillard, about 11 years ago