1% Generic Rule
I am considering a 4unit apt that currently is fully rented (2) for $375 and (2) for $350 grossing $1450 mth. The price is $98K and the sellers bottom $ is $91K. He has been the owner or part owner for the past 8 years. Last apprasial over 5 yrs ago was $87K. Before an apprasial would it be reasonable to assume the gross rent is 1% of the value? I have been approved for a loan at 90% ltv and before I continue I want to have a good grasp that the property would appraise for much more and the asking price actually could be at 90% if appraises at $109k and maybe even below 90% if the 1% generic rule is close to accurate $145K and $130.5k Any advice to confirm or dispell this rule?
I do not think the 1% rule should be a rule at all.
There is a place near me that is for sale that has $3100 a month gross income and is for sale at 126K. If we went by the 1% rule it would look GREAT but when looking at all factors togther it is just an ok deal in my opinon.
Michael
The 1% rule is way to simplistic I think. If I note rents are 1% of the price I might decide to take a closer look, but that is all it means. You have to look at the expenses involved, comps, location and vacancy factors to get any idea of the value.
Some of the properties that I have looked at have had 1.6% rent/price ratios, yet they were hardly exceptional.
For this property, the value will be determined by comparable sales. If there are other similar properties in the nearby area that have sold recently, then their average sale price would suggest the value for this property.
The 1% rule of thumb is just meant to give you a quick and dirty screening tool to filter out negative cash flow properties. For example, single family homes in one large metropolitan area I know have a $350K median price. The 1% rule suggests that this property would have to rent for $3500 per month to predict a positive cash flow.
If I already know that the market rents for the neighborhood max out at $2500, then I pass on this property and look further. On the other hand, if the monthly market rents are at least 1% of the purchase price, then a more detailed cash flow analysis is needed to determine the property's profitability.
Before you get too excited, go back and ask the lender what his 90% LTV loan really means. With purchase money loans, most conventional lenders base their LTV calculations on the appraised value or the purchase price, whichever is lower.[ Edited by DaveT on Date 12/21/2003 ]
The 1% rule is a bunch of crap and so are appraisals as far as I'm concerned. The only thing pro appraisals are good for is getting cash out of your properties and loans to buy them. If you want to know how much they're actually worth, comps is the only accurate way to determine their value. Z
thanks for the responses.
I just wanted to get some xperienced feed back before I continued with researching this property. There are some identical buildings (foreclosed) selling at $72k but there over 3-4 miles away. It's beenhard to find a like property in the normal radius. Well, I think I'll use this rule of thumb to weed out negative cash flows.
Quote:The 1% rule is a bunch of crap and so are appraisals as far as I'm concerned. ... If you want to know how much they're actually worth, comps is the only accurate way to determine their value.Zach,
I don't see that any of the responders to this thread suggested that the 1% rule should be used to determine value. We all know that it does not.
If you really want to know the true value of your property, you have to sell it. The Fair Market Value of your property is the price that an interested but not desperate buyer would be willing to pay and an interested but not desperate seller would be willing to accept on the open market in an arms-length transaction, assuming a reasonable period of time for an agreement to arise.
Until then, comps only suggest a price at which your property might sell. Whatever it sells for, is its value.
Perhaps I am just too depressed, trying to buy property in southern california, but when I see numbers like that I say it is worth an offer. If I had no idea what it was worth, then I woul ask myself" can I make money without using any of my own?"
If you have good credit I would...
get 90% ltv loan
pay full price, ask owner to pay 3% of cc.
ask him to carry 20%... to avoid loan issues, carry on a different prop...transfer back after 1 year.
You get cash back at closing and make pos cash.
I haven't done it a lot, but I have done it. I have been laughed at, negotiated with, and had deals excepted. I would expect your offer to get one of those three.
I don't see how you can go wrong if you make money at closing and money every month. I'd rather over pay, get cash back and make positive, than anything else.
[addsig]