Whether you’re a seasoned Minneapolis or St Paul real estate investor, or just getting started, chances are you’ve heard various rules of thumb when it comes to real estate investing.
The most common of these is the 1% rule. This guideline states in order for a prospective property to cash flow, the monthly rent should be one percent or more of the purchase price. Fair warning. That formula largely hasn’t worked in the Twin Cities for a decade.
Another rule of thumb, much more common to commercial real estate investing than in duplexes, triplexes and fourplexes, is the 50 percent rule. It states that investors should expect a property’s expenses should total about half its monthly or annual income. In other words, if a property grosses $48,000 a year, the associated expenses should run about $24,000.
Those expenses include utilities, maintenance and repair, insurance, vacancy and taxes. What it does not include is the mortgage payment.
For myself, I find this rule tough to do in my head. Cash flow margins on duplexes are seldom so big that the cash flow is immediately apparent in a guesstimate. I personally have to break out a calculator.
Nonetheless, it is in many ways a more realistic tool than the 1 percent rule, simply because it considers expenses. The latter does not.
Of course, if you’re thinking of investing in real estate, it is wise to do a full blown analysis. If you don’t know how, a Realtor experienced with investment properties should be able to show you how. Call me. I’d be happy to teach you.