What fórmulas do you typically use when deciding on purchasing a rental property? If you could provide an example I'd greatly appreciate it without using too much jargon. Most online items I've read say as long as your making over 20% of what you put into it for the year, you're doing great. for example, if I only had to put in $1000 on all costs but made $1200 profiting $200 for the year, that would technically be a good investment.

The 2% Rule.

Monthly rent must be 2% or more of the total "all in" (purchase, closing, rehab).

Example:

* If rent = $500 rent, the purchase price, closing, and rehab = $25,000 or less.

* If rent = $1000, "all in" at $50,000 or less.

Having a construction background, I only buy places that need a LOT of repairs. The more the better. I either do the repairs or trade them out or get them done wholesale.

This builds equity as repairs equal heavy discounts.

I mostly do older mobile homes on land and bank REO's and long vacant places. Like Roy, I typically buy them for less than an old used car.

They're mostly Class C places. Rents about 500 a month.

Some are just cleaned out, minimal work and optioned out on a rent with option to buy to handy people looking for a deal. Some get fixed up to class C levels and held long term.

"Is the damage cosmetic?" vs "Is the damage structural?"

For our first ten, fifteen houses, we tried to mostly stick with cosmetic damage. Stuff that could be solved with paint, light fixtures, flooring, new appliances. We'd install a bit of central heat & air, and the house would be rent-ready.

After we got to about fifteen, we had the funds and the experience to be able to be more adventurous in our undertakings. We were able to deal with structural issues-- needs a new roof, needs leveling, needs rewiring, needs to be replumbed, etc.

I expect to gross everything back-- purchase price + renovation costs-- within, say, five years. With bigger projects, it turns more into six or seven years. Of course, there's always the cost of insurance and taxes-- but I want it to make me back what I've sunk into it in a relatively brief period of time.

I'm trying to buy nice places and trying to rent for about 1% of the cost the house. House 100-130,000. Rent $1000-1250. I think there is less risk, less drama, etc. But there is also less ROI. Everything is a compromise but do whatever works for you. You can be successful at whatever it is you are choosing to do.

If I find a fixer upper (no 10K shacks around here) I want a 20K buffer. IF the after repair value is 120K, and I figure it will take 40K to fix it, my max buy price would be 60K. Maybe if I really want it 65K but I am not going higher because if I go 80 and it really costs me 50K to repair, then I am in to it for 130K and the house is only worth 120K. Is in the end of the world? No so you rent it out for 30 year years and you will still come out ahead in the end. Just try not to get behind the money curve.

Time has a way of making all your bad decisions look OK.

In the above example, you put 130 in, maybe it is worth 300K in 30 years and you collected rent (1000 x 12 x 30) = 360K in rent. Did you become a Rockafeller? No but it still wasn't a "bad" investment. You made money. (unlike me a some First Union stock, that became Wachovia, that became Wells Fargo that I took a major $ bath on 12 years ago). As you do more you will get better at these investments.

The important part is to start making your life better with hard work and forethought and a plan.

Some people here do mobile homes, some do 10K shacks, some do foreclosures, some to fix and flip, some to storage buildings, some do apartments, etc. Figure out what works for you in your area.

For me, the 1% as David explained it is the minimum. Higher is better, but I don't see places like Sid gets.

Are you more concerned about having equity, or net income each month?

Also important to factor in is ongoing holding costs, not just purchase price vs rent. Need to calculate taxes, HOA, insurance (flood?), etc. Also: how new is the plumbing, roof, etc = likelihood of frequent repairs.

BTW: I think what you read online about being good with $200 a year profit is crazy! It's good you came here for "real" info. More like $200 a month minimum net may be OK - if it's in like-new condition and you'll have time to save up for big repairs.

Jon, I don't recommend using rents to determine a good buy because they do not account for expenses, which can vary wildly between properties.

You need a formula that accounts for PROFITS, not raw rents because rents do not tell you how much profit you're making.

That formula is: your yearly profit should be about 8.5% or higher of the purchase price. But do not include the mortgage payment (principle + interest only) in the profit.

Example: If place is $100,000, then the yearly profit should be $8500 or higher to make the purchase. That means that you're making an 8.5% return on your $100,000 investment.

You should know this "jargon" term if you want to search on this super important topic and learn more: NOI. The NOI (Net Operating Income) is your profit. It's all your yearly rents minus all your yearly expenses. But do not include your principle and interest mortgage payment, but you do include the insurance payment. Your payment to the bank will typically include principle, interest and insurance, but you're not borrowing the insurance.

Profit (NOI) is more important than rents. If you own a business and you say you have a million in sales, but you have a million in expenses, you've made nothing, right? It's the same with R/E. You can have great rents, but if your expenses are high, then you didn't make a good deal.

It's PROFIT (NOI) that determines a good deal, not rents.

John/Jon:

You continue to ask multiple in-depth questions in the same thread and ignore the excellent advice you've received. I will answer ONE of your questions, and then I'm done.

1) If you're making $1200/yr on a property that you only have $12,000 of your own money in (based on info from your previous post), that's a return of 10%. Not too bad, but not great.

BUT if you sold the property you'd probably net around $48K. $1200/$48000 = 2.5% return. You can get that kind of return guaranteed from a CD these days, without any of the hassle and uncertainty of being a landlord.

The problem is that $1200/yr profit is a very small amount of money for a house this size. One angry tenant who punches holes in the walls or sells your appliances before he moves in the middle of the night, and you're losing money. I budget $1200/yr for maintenance, and this is for homes that are already fixed up. Furnaces, water heaters and roofs age and need to be replaced.

I can tell you really don't want to sell this house. So keep it. But get a job so you can support it.