Given $200,000 to invest in rental properties...

[Baylor3217]

1) how much would you target being able to generate gross monthly?

2). How would you go about identifying quality properties?  What would be your top 3-5 criteria?

[MrsPete]

Have you ever watched that show with Scott McG_____ on HGTV?  The one where he helps first-time landlords buy a place and fix it up for tenants? 

He says his first rental unit and all his most profitable rental units are near colleges.  I can see the point:  Students don't have expectations for large spaces, and you can get 2-4 students into one unit.  And their parents will co-sign, so you're pretty much assured of being paid. 

[daverobev]

Students = wear and tear, flooded basements, broken windows, etc. Not saying it isn't worth it, we have a friend who does solely student stuff and manages it herself, but it's not for me.

$200k ideally you'd get $4k gross a month, for multi-unit, and lose $2k of that to expenses. But that is a rule of thumb.

Have a read up on the bigger pockets site. You need to know what you're after.

[Baylor3217]

When mmm says his one rental covers all their expenses for the year (about $24,000$ is he saying net of property taxes on the rental and expenses he's generating $24,000 or is that gross (as in $2,000 per month)?

[arebelspy]

1) how much would you target being able to generate gross monthly?

2). How would you go about identifying quality properties?  What would be your top 3-5 criteria?

1) Since you said gross, and not net, it makes a big difference whether you leverage or not (i.e. use the 200k as a down payment for a 1MM mortgage, or just buy something in cash).  Cause you'll gross ~10-20k vs. ~2-4k in those two scenarios, but the net wouldn't be that different, depending on the rate of interest of your mortgage.  (In other words, I think you may be asking the wrong question. :) )

2) This is too broad of a question to answer briefly.  It depends on your goals, criteria, strengths and weaknesses, target market, demographic, type of investment (commercial shopping, residential, apartments, storage units, mobile home parks, etc., and so on and so forth.

[Leisured]

In Australia, the rule of thumb is to divide the value of the property by 1000 to get the weekly rent. Several years ago, my wife bought an apartment for $200K and charged $200 a week rent. This formula is of course only a rough guide. It is essential to use a real estate firm to vet tenants and inspect the property occasionally. They charge about 7% of the rent, but the service is well worth while.

[arebelspy]

In Australia, the rule of thumb is to divide the value of the property by 1000 to get the weekly rent. Several years ago, my wife bought an apartment for $200K and charged $200 a week rent. This formula is of course only a rough guide. It is essential to use a real estate firm to vet tenants and inspect the property occasionally. They charge about 7% of the rent, but the service is well worth while.

That would be a terrible return here in the states.  It depends on your market, but we'd be more like divide by 220 (ideal) to 440 (less ideal) to get weekly rent.

[Baylor3217]

In Australia, the rule of thumb is to divide the value of the property by 1000 to get the weekly rent. Several years ago, my wife bought an apartment for $200K and charged $200 a week rent. This formula is of course only a rough guide. It is essential to use a real estate firm to vet tenants and inspect the property occasionally. They charge about 7% of the rent, but the service is well worth while.

That would be a terrible return here in the states.  It depends on your market, but we'd be more like divide by 220 (ideal) to 440 (less ideal) to get weekly rent.

That's roughly the 2% rule. I just don't see. $150,000 house renting for anything close to $3,000 per month here in Texas. Maybe have that in mos major cities across the state.

That would seem to make it very hard to find financially viable deals. But no one said this was easy :)

[chasesfish]

Rental real estate is local and investors have different strategies depending on what they need.

I've been looking, but am personally planning on paying up for more expensive dirt, but it causes a lower cash on cash return.

[arebelspy]

In Australia, the rule of thumb is to divide the value of the property by 1000 to get the weekly rent. Several years ago, my wife bought an apartment for $200K and charged $200 a week rent. This formula is of course only a rough guide. It is essential to use a real estate firm to vet tenants and inspect the property occasionally. They charge about 7% of the rent, but the service is well worth while.

That would be a terrible return here in the states.  It depends on your market, but we'd be more like divide by 220 (ideal) to 440 (less ideal) to get weekly rent.

That's roughly the 2% rule. I just don't see. $150,000 house renting for anything close to $3,000 per month here in Texas. Maybe have that in mos major cities across the state.

That would seem to make it very hard to find financially viable deals. But no one said this was easy :)

Well 1%-2%, based on the numbers I used.  1% is easy to get in SFRs, 2% harder but definitely doable in multifamily as well a SFRs in the lower price ranges (30-40k that rent for 600-800+ per month).

Either way, the "divide by 1000 rule" of Australia (which is like a 0.4% rule) may apply here to somewhere like NYC, DC, or SF, but pretty much any other market that' debt beyond terrible.

I purposefully got rid of one of my properties that was at about double that 1000 (hit about 0.8% monthly rent to FMV) because it was a drag on my portfolio and there were better places to put the money.

The thing is, you have to look at and compare it with the other options.  Sure, you could buy something at hits a 0.4% rule.  Why would you, when in our markets you can easily hit 1%?  And why do that when you can search and find stuff that hits 1.5%, maybe 2%?

And yes, I'm personally planning on investing in Texas within the next two years, and have made inroads in doing so already, but I am looking at just north of the 1% rule (which is the 440 number I said in my post) for my acquisitions there.  It'll be a crap return (maybe 4-6%?) but it'll balance out some of my other assets, so I'm willing to take that for a specific purpose.

[arebelspy]

Thanks spy and to be clear, my question wasn't in the context really of what the aussie said.  I'd actually never heard of the rule he / she proposed.  I've heard more the 2% rule for SFH, but in the area I'm in in Texas, that would seem to be really difficult to achieve, but I'm still gathering information so don't have any hard data to prove just how hard it may be to find that type of rental.

I'm not sure what your question was, as this appears to be your first post in this thread (with this user name at least).

[Baylor3217]

Sorry. That's my brothers account which I can seem to get logged out on the laptop.

Thanks spy and to be clear, my question wasn't in the context really of what the aussie said.  I'd actually never heard of the rule he / she proposed.  I've heard more the 2% rule for SFH, but in the area I'm in in Texas, that would seem to be really difficult to achieve, but I'm still gathering information so don't have any hard data to prove just how hard it may be to find that type of rental.

[arebelspy]

Ah yes.  Like I said, I'm targeting just north of 1% in the particular Texas areas I'm looking at.

There are better returns, but they come with drawbacks (I was looking at a small apartment in BFE, Texas, for example, where management may be an issue).  And other markets offer better or worse returns based on a number of factors, obviously.

The key thing to do is first determine your investment criteria, then determine what your local market offers and see if it's a fit.  If not, you may need to go elsewhere.  If yes, then determine what the local market is offering further, as something may fit your criteria but not be a deal in your market (say, if your criteria is a 6 CAP and the norm for your market is 8) and potentially modify your criteria.

Lots of research and due diligence, boots on the ground and education.

[Another Reader]

Hey Arebelspy:

How's the Warren, MI investment going?  That's a 2 percenter, IIRC.  Are you thinking of buying more houses up there?  Have you encountered any unexpected problems? 

[arebelspy]

Hey Arebelspy:

How's the Warren, MI investment going?  That's a 2 percenter, IIRC.  Are you thinking of buying more houses up there?  Have you encountered any unexpected problems?

Excellent.  That one is rented at 600/mo, all in cost was 27k. It's well below market and we'll be raising the rent at some point, as previously discussed.

Vacancy there is non-existent.

Bought another on Jan 31 and just finished the rehab.  Price with closing costs was about 38,000 and another 400 to the previous owner for a washer/dryer set. Rehab just finished this past week, cost 4100, so total all in is at about 42500. Listed it for rent Wednesday evening for 875. Had multiple calls the next morning and had it rented about 8 hours later to a good tenant with 1200 security deposit on top of the first months rent.  Total time on market: about 12 hours. Probably should have asked for 900-925.

Another one is supposed to close this week (was supposed to close Feb 4 but was delayed waiting for a snow bill from the city).  About 36k total purchase price + closing costs, needs about 8k of rehab.  Will rent for 950-1000, easy (in a nicer area, and much larger).

Also in contract on a 4th one, that is supposed to close in a few weeks.  32k, no rehab needed.  Smaller, but in a slightly better area.

(Only the first is in Warren, but the rest are in the same area.. Roseville, Eastpointe, etc.. Within a few miles of each other, generally.)

Written plan has me buying 10 of them this year, then stopping.  At that point I'll probably reevaluate and see.

Totally different market than here (Vegas) or Texas.  Much more similar to Memphis and Chicago. Buying strictly for cashflow.

[Another Reader]

Can I get your agent's and property manager's phone numbers?  I'll take the next 10! ;-) 

[arebelspy]

No problem.  He's in Vegas this week, I'm getting together with him for dinner on Thursday.  Send me a PM if you're serious.  :)