Posted by David Krulac on March 28, 2001 at 21:18:24:
consider
a. what the interest rate is or the cost of financing. at 6% interest a rental is more attractive than at 15% all other things being equal
b. what are other expenses, like who pays the utilites.
the answer is to figure out the cashflow, positive or negative after paying all expenses and if you are comfortable with that number then go for it.
In the alternative if in the $165K price range you can’t make money look in another price range like $120k or $90k. Usually as the prices go down the returns go up!
I have heard from several sources that if you can’t rent for at least 1% of purchase price that a property is not worth investing in.
In other words, a $90k property should take in close to $900 per month in rent, $100k should take in $1,000 per month.
My current home is worth about 165k, but would only rent for 900-1000k per month. 165k is just above median price for housing in my area, so most rents would never come up to 1% of FMV, not even .9%.
Is there any hope? Let me know what you know, and let me thank you ahead of time. I love CREOnline. Thands to all you REI wizards!
One of the reasons rents do not come up to the ratio is that the occupant cannot write off taxes and interest on his personal return. An owner occupant would be willing to pay more because they can write it off. If you devised an arrangement that would allow the investor to depreciate their portion and allow the owner to write off those taxes and interest you would have something worth doing. Your 1% rule is good only for certain interest rates and property tax rates. In some places annual property taxes are 1.5% of value. In the metro DFW area try 2.8%.
Oh that devise to get someone to lease your 165K house for $1650 a month is called a PACtrust.
Will, The ratio you are describing here is, in my opinion, basically correct. If you live in an area where prices are better than average (sounds like you do), you’re going to find it VERY hard to break even without a large downpayment or equity position. This creates a problem, because we want to have as little money involved as possible. I lived in Calif. through the 70’s and 80’s and it was a common problem. With no cash flow, the only way that anyone made money was through the rediculous appreciation we enjoyed until the bubble burst in '89. If you’re in this situation, you’ll have to either sell and carry the paper, lease option with a large down, or have your money tied up unless you want a large neg. cash flow. Better to exchange into an apartment building that you can buy that is either poorly managed or a little run down so you can get a deal and then improve cash flow. Multi unit properties are more often valued by cash flow rather than surrounding sales and they have a more realistic price in these areas. No investor will pay more for them than the cash flow will support and if you can raise the bottom line, then you raise the value.
BillW.