OfflineBUY RIGHT! IT’S THAT SIMPLE. YOU MAKE YOUR MONEY IN REAL ESTATE WHEN YOU PURCHASE THE PROPERTY.
I know this isn’t brain surgery here, but it’s so simple that many people miss it. They think that the property will go up exponentially in the future, and therefore paying today’s market value won’t hurt them. But that’s a mentality that will set you up with a bunch of rental properties that you don’t make any money on, and have to sacrifice time and resources to maintain. It just isn’t worth it.
The smart money says to buy in well below market price, factoring in all repair costs, etc., leveraging your cash with mortgages, and then recouping that money as soon as possible through renting or flipping the property.
You have to find properties with motivated sellers. You have to find properties where owners are willing to part with the property for less than market value, significantly less.
The target price usually falls around the 60-70% of market value range, depending on your valuation method. Now, when looking for long term rental property, many investors go by the 1% rule.
What in the world does 1% rule mean? It means that whatever the investor thinks they can get in gross rent should be about 1% of the total cost of acquisition (purchase price + closing costs + any additional post closing repairs). We recommend get more than 1%, not because of greed, but because the market has driven the prices of property up so that the 1% rule doesn’t cash flow. It just makes good business sense.
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125
You made some great points and I agree, I think making money at pvrchase has been forgotten and all is focused on the flip or the assign. There is money to be made so rlow down, think and make more money.
Anita
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"FAILURE IS NOT AN OPTION"
cfuller, well said. That's why you're a Coach. Concentrating on buying right has made many millionaires.
In the past, the 1% rule has also been used to gauge how much equity a residential property (usually with an assumable loan, or impute one) has. The monthly net cash flow should be at least 1% of the equity in the property, and that determines how much the investor can offer. Like many rules of thumb, it often doesn't work in certain areas or markets.
cactusbob
Hi catusbob,
I'm confused on a point you made regarding the 1% rule. I understand what coach cfuller stated regarding 1% of cost of the acquisition of the property to use as a rule of them for the amount of rent but I'm not sure I understand the following:
When you state
I appreciate you to clarify this. Thank you.
Love, Light & Blessings,
Darlene
The 1% rule of thumb I mentioned would serve to value the property you already own, or a property you are considering purchasing. You need to estimate or know the operating expenses. If the property is free and clear, the monthly income after expenses, capitalized at 1% (income after expenses divided by .01) gives an approximate value of the property.
Example: The monthly income is $1,200, and expenses are $250, you have an income after expenses of $950. $950 divided by .01 equals an approximate value of $95,000.
If there is a loan against the property of $70,000, the monthly expenses may be $420 more, due to the loan payment. The net income after expenses is now $950 minus $420 or $530. That indicates a value on the equity of $53,000. Add the $70,000 loan and the indicated property value is $123,000.
Does that mean that the property gained $23,000 in value because it has a loan on it? Of course not. It is merely a rule of thumb, and the loan interest rate used here is about 6% but the cap rate is about 12% (1% per month is 12% per year, and we're using monthly income), so it works out that way. Partly for that reason, this is merely a quick way to get an approximate value. That's why you won't find appraisal reports using that method, they will use comparables instead, which are a direct link to value. Real estate in some expensive areas of the country may produce a negative cash flow, so it obviously won't work there.
I hope that helps.
cactusbob
The 1% rule note by cfuller:
Gross rents divided by .01 = approximate value
Example: 1200 gross rent divided by .01 = 120,000 value
cfuller brought this up because the 1% rule is used to determine whether or not a property will cash flow. Another way to look at the rule above is: The maximum I want to purchase a house that rents for $1200 is a purchase of $120,000.
Cape Rate (capitalization rate):
Gross rent
- expenses (expenses does not include the mortgage)
+ any additional income for the property
= NOI (net operating income)
NOI divided by sales price or purchase price = cap rate.
$950 dollars (NOI) divided by $123,000 price = 9% cap rate.
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125
Thank you both catusbob & nstreet. I now have a better understanding of this entire method and see how this does not work in more expensive areas such as where i am in Long Island, NY. Average 3/1 SFR rents go anywhere between $2,500-$3K with the average purchase price at 369K - 425K. One would have to purchase the home at $170K with $800 expense (taxes).
Do I have that right? Thanks
Love, Light & Blessings,
Darlene