Posted by mattc670 on August 12, 2003 at 14:17:26:
interesting read Ron.
Ed: Prices that provide + cash flow? - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on August 10, 2003 at 09:31:24:
I received the following question via e-mail. I rarely answer e-mail privately so post here so others can learn or contribute. I see no problem with privacy.
–--THE E-MAIL -----*
Hi Ronald:
I read your response to a posting on CREonline. The lady who wrote the post was concerned that buying rentals in her area just wouldn’t work due to the high cost of the homes. You replied, “If you want traditional real estate rental investing for the long term, buy your income properties someplace else, where prices are lower.”
Ronald, is there a price range you have committed to in buying properties? A price range that you know will give you a good flow of tenants vs. a monthly rental just to high for many prospective client."
Thanks so much!
Ed
“Life is what you make it. Always has been, always will be.” Grandma Moses
—------* RESPONSE ---—-
Ed–NC------------
Nice to meet you. I enjoyed the secenary in NC. That must be a fine place to live.
In general, the lower the price, the higher the ratio of rent to property value, which is usually closely related to the cost. Thus, the efficiency of the properties in generating income is best with the lowest end properties. I recommend that people buy properties in as low-down a neighborhood as they can stomach.
I don’t have a hard-and-fast rule. It probably depends upon the ratios of rent to price in each location, plus the investor’s personal demand for rental income. Some investors get $50 a month per property or unit, others get $350 and more.
I would suggest that buying over $150K is probably not a good choice. However, that will work west of Chicago.
I think the better measures are cap rates and monthly gross rent divided by purchase price or market value. Cap rates of about 9.5 and up are definately preferable. I like to see 15 and above.
Gross rent ratios are a very crude measure of income vs value of he property. However, they are handy for a quick look at whether to consider a property further or to ignore it. Here, you typically should ignore any property with a ratio of less than 0.75 percent, at today’s low interest rates for mortgages. When mortgage insterest rates are higher, you may need to use a higher figure. If you are getting the traditional 1.0% a month, you are probably going to be doing alright with a rental property, unless mortgage expenses are high. I like to see 1.2% a month and would recommend that using that as a minimum will prevent you from buying alligators.
However, it may also require you to work hard, as not many properties in most areas will sell for that ratio.
I sepecialize in buying properties at county tax sales, so buy for monthly rent ratios of about 2% a month and above. Sometimes as much as 20%, but that is rare.
Most of my newer acquisitions are worth $15K to 40K or so. That is because I buy in OK state where prices are low compared to the rest of the nation.
Good Investing*******Ron Starr********************