026 Breaking down the deal...Go / No Go with the 1.5 Rule

This episode was born when Tyler was out in the field recently at an open house.  The home was priced at $105,000 and was a two bedroom / two bath home that would rent for $950 per month.  Real estate agents were parading untrained “investors” around showing them a retail property that clearly will not perform well as a rental at the $105k price point.  The property is priced for an owner occupant.  It became clear to Tyler that these unsuspecting “investors” were unknowingly being lead into a losing situation by inexperienced real estate agents.

 

First off, knowing what “fair market” rent will be is a critical part of the process.  This takes work….picking up the phone, calling landlords and property managers that rent properties very similar to the one you are thinking about buying.  When doing this, call older ads that by now should already be rented.  This is important to obtain factual information on how much it rented for, versus “asking” rent price.

 

As in investor, you should have a solid handle on the rental market in the neighborhood your properties are located in.  Comparable properties can only be considered if they are in similar locations, with similar amenities and are in similar condition.  This is the first reason why an experienced property manager is a critical member of your team.

 

Go / No Go Quick Test Method:

 

Take the monthly market rent and divide that by 1.5%

 

$950 Rent Divided by 1.5% = $63,300 which is the maximum acquisition cost we can be at to cashflow appropriately.

 

In the above example, at $105,000 purchase price let’s figure out how much the property would need to rent for in order to “make sense” as an investment property for the CashFlowGuys.  Here is the math….

 

$105,000 Purchase Price

X 1.5%

$1,575 per month is what it should rent for to qualify as a “go” in our quick test method.

 

Will the property “cashflow” at less than $1,575 per month rent?  The short answer is “it depends”

 

An investor must consider their “cost of funds” EVEN IF PAYING CASH.  

 

The cash you invest should have a cost of funds figure attached to it because it can and should be out earning you more money...otherwise why have it?

 

Below is a breakdown of how cost of funds and terms affect your net return using the $105,000 house that rents for $950 per month:

 

Purchase Type

Monthly Cashflow

Cash on Cash Return

Cash

$466.00

5.2%

15 yr Loan 6% & 30% Down

$154.00

-5.5%

30 yr Loan 6% & 30% Down

$26.00

.9%

 

As you can see….for us this is a No Go opportunity.

 

For an investor to be profitable, they MUST factor all their costs….that means everything.

 

Here is the “short list”

Lawn Care

Utilities

Cleaning and Maintenence

Capital Expenditures

Insurance

Legal and Professional Fees

Management Costs

Taxes (Property and Income)

Flood Insurance

Advertising

Travel

Vacancy Loss

 

As Robert and Russ aka “The Real Estate Guys” always say “Do the math and the math will tell you what to do”

 

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