Should I Use Real Estate Investing Rules?
When you are in the field of real estate investing, it can be very tedious to go through deal by and deal and have to analyze each investment property. If you are looking for truly “passive” income, it can also be thought that you might like taking the “shortcut” or “easy way” to making money. Given that you want to create an easier way to make money, you probably would go and create a system to help you easily sift through more real estate deals, in less time. In my opinion, this is how real estate investing rules started. We are going to look at two of them today and look at their supposed use in the real estate investment world.
The 50% Rule
The 50% Rule is just as it sounds. It assumes that if you take the gross income of the rental property, then divide that amount by two, and finally subtract the mortgage debt, you would be left with cash flow. Is this actually a useful interpretation of a good investment?
For those real estate investors that go through many deals in the day, it becomes important to come up with systems and processes which can reduce the amount of time they spend looking at bad real estate investment deals. Looking at it from that point of view, it can definitely help weed through a lot of real estate deals.
For example, let’s say that we know a property is going to be sold for $200,000, and that investment property generates around $1500/month in income. Removing 50% from the $1500 income leaves us with $750, and after looking at a mortgage calculator we can estimate that the payment on the loan of $160,000 is approximately $869/month. This means that we would technically be left with negative cash flow if we purchased this property.
The only problem with this investment estimation method is that expenses may not be 50%. They may be more or less, and by doing this can have you miss out on some promising deals in the long term.
1% or 2% Rules
Many real estate investors looking at deals will use the 1% or 2% rule. It will depend on the area that you are investing in. For example, in Ohio you may see more real estate investment property that will reach the 2% rule, and there are many factors for that, while here in Bakersfield you will more likely see properties closer to the 0.8% rule or the 1% rule.
I believe this method can be a good use for estimation, but you would have to adjust it for the area that you are in, and the returns that you are looking for from your portfolio. If your investment goals say that you need to earn a 10% return to be able to achieve your goals, then we know that you would need to hit around a 1.2% rule property. Knowing this, you would be able to throw out properties that are not close to that number, which would help you save your time while looking for more real estate investment properties.
We have done many deals, and continue to do many deals that return our clients a net return of 6%, 8% or even double digits on their real estate. If you are interested in real estate investing in Bakersfield, feel free to reach out to Synergy Real Estate and Property Management.
We provide our real estate investing clients a one-stop shop service where you can be sure that you are buying a quality investment property, and having that property managed in order to preserve your initial investment capital.
Until Next Time,
Sanjeev (Sunny) Advani
3400 Panama Lane Ste J
Bakersfield, CA 93313