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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: meteor on November 12, 2015, 11:20:17 AM

Title: Simple formulas for evaluating rental property?
Post by: meteor on November 12, 2015, 11:20:17 AM
I find it helpful to have simple formulas for "back of the envelope" evaluations in finance (such as the 4% rule for retirement, rule of 72 for stock market returns, and car purchase price should be less than 1/2 your annual salary).

This forum has much -in depth- analysis of real estate (interest rate variability, etc) but I'm looking for some VERY BASIC things like: 

(Assuming I bought a rental house for *CASH* (no loans/interest rates are involved)

-What is a formula should I use estimate annual expenses/insurance/repairs/taxes? (For example 1% of home price/value)?
-What is a formula for determining whether a rental house is a good deal? (for example, should monthly rent should be what percent of house purchase price?)
-Rule of thumb historical home value return (comparable to historical stock market returns)

I realize the any of these answers could be a book length, but I just want some basic formulas I can keep in my head.

Thanks!!!!
Title: Re: Simple formulas for evaluating rental property?
Post by: ncornilsen on November 12, 2015, 12:20:21 PM
generally, a house is worth an indepth look, and is a good bet for cashflow, if you can collect 1% of the purchase price per month... AKA the 1% rule.
Title: Re: Simple formulas for evaluating rental property?
Post by: clarkfan1979 on November 14, 2015, 05:11:46 PM
Shoot for the 1% rule. However, it is usually only possible with buying a house that needs some rehab.
Title: Re: Simple formulas for evaluating rental property?
Post by: Landslave on November 14, 2015, 07:55:57 PM
Gross rent 1% of value and all overhead (taxes, HOA, insurance, maintenance, vacancy) 50% of rent income.  Return should then be about 6% plus indexed to inflation (the value of the property should usually at least appreciate with inflation -- but you could get lucky or UNLUCKY in this regard--buy a property in the right location).
Title: Re: Simple formulas for evaluating rental property?
Post by: thedayisbrave on November 14, 2015, 08:37:00 PM
Look up the 1% rule, 2% rule and 50% rule... BiggerPockets is a great resource.

Don't bank on appreciation.  That's not a strategy... it's a gamble.

Shoot for the 1% rule. However, it is usually only possible with buying a house that needs some rehab.

This is very location specific.  All of my rentals exceed the 1% rule and they needed no rehab whatsoever.

Title: Re: Simple formulas for evaluating rental property?
Post by: Landslave on November 14, 2015, 10:12:29 PM
Look up the 1% rule, 2% rule and 50% rule... BiggerPockets is a great resource.

Don't bank on appreciation.  That's not a strategy... it's a gamble.

Shoot for the 1% rule. However, it is usually only possible with buying a house that needs some rehab.

This is very location specific.  All of my rentals exceed the 1% rule and they needed no rehab whatsoever.

  Well done!  Where are those units (what city)?
Title: Re: Simple formulas for evaluating rental property?
Post by: thedayisbrave on November 15, 2015, 07:58:15 AM
Look up the 1% rule, 2% rule and 50% rule... BiggerPockets is a great resource.

Don't bank on appreciation.  That's not a strategy... it's a gamble.

Shoot for the 1% rule. However, it is usually only possible with buying a house that needs some rehab.

This is very location specific.  All of my rentals exceed the 1% rule and they needed no rehab whatsoever.

  Well done!  Where are those units (what city)?

Raleigh-Durham metro area, NC