All Forum Posts by: David Coombes

I have read on here that many people can't get the 2% rule to work.  Use this as a check and balance to the 50% rule.  Most people seem to fall in the 1 - 1.5% range when comparing to the 2% rule. Know what your bottom dollar your willing to accept.   When you find a property and make a list of repairs items and make a timeline of when they need to fixed and estimated cost.  This will help plan out if you are creating enough reserve cash to maintain the property.  Example; Roof replaced in 8 yrs at the $8k.

You're right on the money with the ROR question, it's purely time and experience. Those targets are ever-changing because markets change, too.

One thing to keep in mind is that sellers are alway selling for a reason, and it's usually because they're not making any money -- which can be a sign of them perhaps being a lax landlord. I own a PM company so it's my business to manage like a professional, because that's exactly what I am. That means I'm a bit more strict than the average homeowner with tenants, so part of that 50% turnover might be caused by conditioning from previous landlords, which is hard to course-correct. South City has some nicer areas, and that pre-conditioning will be less of an issue (typically) with higher-end properties, but some tenants are and will be used to lax, less professional landlords. So my figure comes from, again, my own experience, and what you see will be largely determined by your management style and who your tenants are.

As I see we're both in St. Louis, if you'd like to talk more in-depth about any of this I'd be happy to help, so don't hesitate to reach out.

Cheers!

@David Coombes I use the 50% rule, among others, as a 3000ft litmus test to see if I want to look at the property, then I run the numbers after I have seen the building. Each building has to hit my minimum ROR, and I have area-specific expectations for that ROR. I'm investing in the same areas you as, so certain pockets vary slightly on tenant quality and taxes, for instance, both of which affect returns.

A few more things to consider and include in your calculations so the first year doesn't terrify you:

After the identification process, I'd suggest that, for the older buildings St. Louis has so many of, you'll need to make sure you have enough in your sinking fund to cover the unknown and unexpected expenses. I'd also expect about 50% tenant turnover for any tenant that's in-place in the first year for those areas, from what I've experienced. 

@David Coombes, we call them rules, but they really aren't rules. They are guidelines to quickly ascertain if a property bears further consideration. Always run the actual numbers before investing.

For example, 50% is roughly right and you will probably be fine applying it without further due diligence if you are well diversified, but there are certainly cases (even on the same street) where the numbers may be off due to higher taxes, maintenance, vacancy, capex, etc for a given property.

Use these guidelines to quickly evaluate a deal and then run the numbers and other due diligence on the ones that are close.

Stick with the 50% rule over the 2% rule. 50% will guide you well where the 2% can lead you off track and into bad investments reaching for a higher on-paper yield. St. Louis offers many deals over 1.5% and even a good number over 2% but you need to analyze each property and know your area to make sure those numbers can actually be attained. The Tower Grove area offers lots of opportunity and lots of pitfalls, do your homework and you will do fine.

Stick with the 50% rule over the 2% rule. 50% will guide you well where the 2% can lead you off track and into bad investments reaching for a higher on-paper yield. St. Louis offers many deals over 1.5% and even a good number over 2% but you need to analyze each property and know your area to make sure those numbers can actually be attained. The Tower Grove area offers lots of opportunity and lots of pitfalls, do your homework and you will do fine.

So it is very, very rare to find 2% rule deals. Those are rarely, if ever, found on MLS, zillow etc. A deal usually only needs to be at 1% to meet the 50% rule.

ex. with some quick dirty numbers: 100k house, renting at 2k (2%), mortgage would be $530. Throw in 1k in expenses and you cash flow at 470 dollars with very conservative numbers. That would be an incredible deal and a few of those would have you set. 

Thats almost 30 percent Cash on cash return (not talking about ROI with debt pay down and appreciation) Double your money in every 3 years.

Now 1 percent rule on same house. 100k, rents at 1k. mortgage is 530, expenses 500. You negative cash flow 30 dollars with very conservative numbers.  

As you can see in this example you would only need slightly above 1% to make deals work with 20 percent down, and this is buying without any discount and without doing anything to add value to the property. 

Also, the worse neighborhood you enter (C and D classes) the better the property will look on paper. But, don't be fooled as the cheaper houses (say 50k) will still have the same cost for an HVAC or roof (Cap Ex.) and also will have higher repair costs (usually) and vacancy rates d/t the renter population. 

Just analyze the property with 40-50 percent of gross rent dedicated to expenses (maybe 50 for c and d and 40 for B or A) 

150/mo for repairs/maintenance is a good figure, get an insurance estimate to break it down monthly, calculate the taxes (county records) and do play with the vacancy rate depending on your area. Say 5-8% for a A/B area and 10-12% for a worse one, and then of course 8-10 percent for PM (even if you plan to do it yourself)

Again, 2 percent rule is very very rare. Find a distressed place that can be brought up to rental standards in the neighborhood. Then maybe you can create a 2 percent property, based on your buying price, but its unlikely you will find one already at 2%. Who would sell such a property thats cash flowing so much! You have to find the problem with the place and solve it to reap the rewards

@Michael Morgan 

Sorry to hear about your marriage. Here are some links that I have put together for you, hope it will help you on your path of REI. I hope this will answer some of your questions.

https://www.biggerpockets.com/renewsblog/2013/11/0... (Get Paid House hacking)

https://www.biggerpockets.com/renewsblog/2014/03/13/investing-multifamily-ben-leybovich/ (Podcast 061 - How to succeed in multifamily investing-Ben Leybovich)

https://www.biggerpockets.com/renewsblog/2013/04/09/how-to-buy-a-small-multifamily-property/ (How to buy a small multifamily property)

https://www.biggerpockets.com/renewsblog/2015/11/16/how-to-choose-areas-multifamily-deals/ (How to choose multi-family deals)

http://www.biggerpockets.com/renewsblog/2014/07/19/how-to-buy-a-duplex/(How to buy a duplex)

https://www.biggerpockets.com/renewsblog/2013/12/12/bp-podcast-048-duplex-managing-tenants-darren-sager/ (Podcast 048 Duplex investing and managing tenants-Darren Sager)

Much success to you!