1% Rule Of Thumb For Rentals... Never Works Here
I've been reading about how a good screening tool for finding decent cash flowing rental property opportunities is the 1% rule (total rents should be 1% of price) and in my area that doesn't work because property values are way high.
2FH's sell for about $500-$600k and the typical rents for a 2FH are about $2200/unit........ just doesnt work..
So short of purchasing a property at auction or preforeclosure, theres no workable solution?
What if I purchased a 2FH and financed 80% interest-only loan and 20% note to the homeowner to keep the property for 5-6 years then sell. The interest-only would knock any easy $300/month off the payments to bank and would give me better cash flows during that period. But I'm assuming the inherent risk here is the market risk if the prices crash in that 5-6 year period, then I'm left to cover the difference.
When are interest-only loans a good idea?[ Edited by mobster75 on Date 05/05/2004 ]
When you are confident that the market is going to continue to climb......Or you have enough equity to weather the storm if it takes a downward turn.....They are very popular loans here in CA because most people can't afford to get into a house these days as the market is so high right now Interest only is the only way many can qualify...if/when the market turns out here there are going to be a lot of trustee sells......
Mobster,
The main advantage to an interest only loan today in your market is the low interest rate. There are lenders that will do 80/20 loans.
The first mortgage is an 80% interest only loan at around 4% and the second mortgage is a 20% amortizing loan at 10%. The monthly interest only payment on a $400K first mortgage will be $1600. The monthly debt service on the second mortgage will be $877.57 for a total debt service of $2477.57 on a $500K loan.
If you two-family is generating $4400 per month in gross rental income, this debt service leaves you about $1922 per month to cover operating costs. What you don't need is your cash flow.
The 1% rule is just a rule of thumb, but it should not replace a detailed cash flow analysis. You may find that rental properties in the $500K price range are more affordable than you think.
If you sell before the interest only balloon comes due in ten years, then you have collected a nice cash flow with no money down while you are waiting to collect your profits from appreciation.