Hi Jeff, I myself struggle when it comes to these types of expressions or rules of thumb. Frankly, “$100 per door” means nothing to me without knowing the full property profile, local market, financials, deal structure, history, etc., etc.
I'm also a bit perplexed as to why so many investors refer to their real estate portfolio by number of units. What is much more interesting is the notional real estate value (say for example, per appraisals), gross rents, fixed costs plus variable cost assumptions. Historical ROI, rental rates and so forth – these are the metrics that tell me pertinent aspects of a portfolio. Not dissimilar to looking at a stock portfolio – I want to know which companies you own, what the dividend yields are, volatility, cost basis, exposures, etc. – not the fact that you own 12 different stocks.
If you are looking to build a portfolio to generate income ($72K per annum) and you want to do this via real estate (as oppose to other income producing investments) I would start by backing into $72K per year:
- (1)If your assumptions include the 50% rule, you’d need $12K per month gross rents, as you say (not including mortgage)
- (2)You could use the 1% rule on the basis you target higher quality properties / markets. This requires $1.2m in real estate assets ($1.2m x 1.0% = $12K per month gross rents)
- (3)If your model uses the 2% rule, $12K per month gross would require $600K in real estate assets.
Back to the “number of doors” line – the real estate assets could consist of $200K properties or $25K properties; number of doors is the result of how you structure it.
With respect to point (3) to the extent you are familiar – obviously higher yielding properties come with more risks (sometimes risks that don’t balance with the reward) and point (2) is, in my experience, closer to reality (particularly in what has been a solid housing market). But again, depending on how you structure it, you’re likely to end up in between the 1% and 2% rule, but realistically closer to 1%.
Another way to look at this is how much real estate you can afford (appreciate this could vary depending on financing) and looking at different markets to understand where baseline yields are (i.e. the West vs. Midwest vs. the South) draw an estimation as to how much monthly income can be generated from there.
You mentioned you’re 51; if you don’t have 20 years to pay down mortgages, perhaps consider larger down payments or different ways to optimize what you have within your time table to have this income in place.
Hope this helps.
