I recently stumbled onto the BiggerPockets Ultimate Beginner's Guide to Real Estate Investing, a free PDF on how to get started investing in real estate. It was a decent read, even for someone like me who's been in real estate a bit, but it mostly reinforced what I already knew -- I didn't learn a bunch. It also spent a lot of time on areas of real estate investing I'm not interested in, so I skipped those sections. That said, I thought I'd share it with you because the price was certainly right. It was FREE! :)
The book listed three "rules" of investing in real estate that I thought I'd share with you. Then in a later post, I'll share my "rules" (or at least how I evaluate a property). BTW, I don't use any of their rules. Not to say theirs are wrong and mine are right, just letting you know this upfront. I'll let you decide what you like and don't.
Here's their first rule:
The 2% rule states that your monthly rent should be approximately 2% of the purchase price.
Example, a $100k home should rent for $2,000 a month.
Of course, if monthly rent is more than 2%, I assume that's even better, right? :)
My monthly rents, once I get done remodeling all my units (the last one is almost done!), will be a bit above 1.8% of purchase price plus remodeling costs.
Personally, this rule would eliminate all the properties that I've purchased (which have great returns, by the way). They admit that it's very conservative and it should be used as a guide only. There's also a lot of debate in their forums that it's very unrealistic. I'll let you decide what you think.
The 50% rule simply states that 50% of your income will be spent on expenses -- not including the mortgage payment.
Personally, I HATE this rule. Why? I don't like to ESTIMATE expenses with a flat percentage. I prefer to do a pro forma for every property before I make an offer on it. Only then can I know if my properties are worth the investment.
That said, once all my properties are completed, it looks like my expenses will be 50% or so (maybe a bit more) of my income. But I don't have mortgages, as most of you know.
The 70% rule says that you should only pay 70% of what the after repair value is, less the repair costs.
They use this example to explain the rule:
A home which, after being fixed up, should sell for approximately $200,000, needs approximately $35,000 worth of work. Using the 70% rule, a person should multiply $200,000 by 70% to get $140,000 - and then subtract the $35,000 in repairs. The most a person should pay for this property, therefore is $105,000.
They note that this rule is used by flippers, so no wonder it seems strange to me. I'm not a flipper. Though who knows, maybe one day I will be. :)
The BiggerPockets people end their rules section by noting that these are just rules of thumb designed to give a potential buyer an idea of whether or not a property is worth looking at a bit deeper. I think that's fair. I have my own rules which I use to give me a sense of whether or not a property is at least in the ballpark of what I'm looking for. Those rules help sort out the vast majority of houses on the market, allowing me to focus on the ones that could be winners.
So, what are your thoughts on the rules above?