All Forum Posts by: Dan D.

 You did.

And just to be clear, I agree with the rule and it's purpose and what you said. 

I've made this argument in another thread, but I don't understand how two identical homes if they have the same exact tenant base would incur higher expenses as a dollar value simply because you have a higher rent on one that's a block closer to something positive.

I would think in a more expensive rental-designed home, the granite counter tops don't break as often, tile floor doesn't go bad as often as frequently as a cheaper quality laminate wood floor, etc.

Another aspect to the 50% rule is that you should perhaps aspire to have your expenses reach 50% if they aren't.

You need to expense your phone, your car / drive time, your marketing, etc. as you grow your business.  So shooting for 50% expenses (or even higher in that case in a legal fashion) might be your goal to minimize taxable income.

I find Zillow helpful, but with anything validate your info.

If you watch their values consistently and view past sold home data, you can see if the zestimate value trends higher or lower.  From there you need to take into consideration your only rules for valuation to verify if it's accurate or not in your area.

Has anyone on here had success building a new home for a single family rental?

Thought is you can build it tenant proofed up front in an area you like for a long term buy and hold.

I'm guessing the costs are prohibitive, but curious if anyone has done this and made it work.

I see a possible deal on some lots that are available in a good, healthy growing neighborhood.  Was wondering if this might make sense.

 Good catch.  My numbers were wrong for cash purchase.  You are correct.  (again).

:-)

So I'm updating my sheet to include benefits of tax write-offs for expenses at a 25% tax bracket, and the value of depreciation as well as the value of debt paydown.  Turns out that makes a pretty big difference and that's the hidden value of real estate the way it looks.

 It definitely would be...

Unless:

A)  There are exceptions to the rules

B)  The dreaded betting on "appreciation" or at least "inflation" ends up being the real hidden benefit for investing in real estate.

C) Not calculated in this is depreciation and equity gain from mortgage paydown, but that is usually secondary to cash flow.

I don't know if I can make any of it work here in Minnesota either.  I just thought it would be interesting to look at to see what type of deals and returns people really get when these rules go as planned.

I got into a discussion about expenses in an earlier post about the 50% rule and as many have said, history tends to run in line with it.

So I took that as a rule, and backwards calculated purchase prices using the 50% rule coupled with the 1% rule, the 2% rule, and what many on the podcasts tend to want to get which is $100 per door.

I made a spreadsheet with the various price points and below are images of what I received. For each I started with target rent, and 50% expenses, and then worked the various rules backwards from there to determine what the maximum purchase price would be and then calculated the ROI based on these rules for each scenario.

This is what I found.

First, one percent rule:

For the one percent rule with 50% expenses, the ROI will always be 4.7% if you are putting 25% down. If you buy cash, your return for year one (not shown on the graph) is always going to be 1.16% if the rules hold true.

Next the two percent rule:

For the two percent rule, you make a very nice 28% return, but of course, the purchase prices in many markets are cost prohibitive if you are over a rental price of $1,000 per month.  I think this has long been understood that 2% is difficult to find unless you are dealing with lower priced housing.

In many cases, you'd need to purchase for all-cash. In that case, the ROI with the above rules is 7.1% if the rules stay true.

Finally, the $100 / door goal:

In this case, I plugged in rent, expenses at 50%, and the static profit of $100 per door to see if there was a price point that came out with a great ROI.

Of course, the rent at $500 per month provides 12.9% ROI which actually comes in at a 1.3% rule.

On rents of $1,000 per month, your purchase price would need to follow along the 1% rule with a purchase of $99,349 which would yield a 4.8% return.

So the questions comes to mind after analyzing this, if these rules are generally accepted as rules, are people really getting wealthy (not counting on appreciation) from these type of returns as illustrated above?